New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

George E. Pataki
Governor

Gregory V. Serio
Superintendent

RE: Internal Replacement of Life Insurance, Regulation 60

Question Presented:

May an insurer waive the contestability and suicide clauses in a new life insurance policy, which will replace a policy it previously issued to the policyholder?

Conclusion:

Under these specific circumstances, such an action would be contrary to the New York Insurance Law (McKinney 2000 and 2003 Supplement) and Regulation 60, N.Y. Comp. Codes R. & Regs. tit. 11, Part 51 (1998).

Facts:

An insurance agent that is licensed pursuant to New York Insurance Law § 2103(a) (McKinney 2000) has a client with an individual life insurance policy from an insurer licensed in New York. As part of a general program to "update" coverage, the insurer has offered the client an opportunity to surrender his existing policy and purchase a new policy from the same insurer. Prior to issuance of the new policies in the program, the insurer will fully underwrite the risk.

The client has requested that the insurer waive the contestability and suicide clauses in the new policy. The insurer has indicated that it is willing to so waive, but believes such an action is precluded by Regulation 60, N.Y. Comp. Codes R. & Regs. tit. 11, § 51.6(b)(8) (1998). The agent believes that such an interpretation of Regulation 60 is contrary to the best interests of the policyholder, especially since an affiliate of the insurer, which does business outside of New York, has waived such clauses under similar circumstances.

Analysis:

New York Insurance Law § 3203(a) (McKinney 2000) provides:

All life insurance policies, except as otherwise stated herein, delivered or issued for delivery in this state, shall contain in substance the following provisions, or provisions which the superintendent deems to be more favorable to policyholders:

* * * *

(3) that the policy shall be incontestable after being in force during the life of the insured for a period of two years from its date of issue, . . . except in each case for nonpayment of premiums or violation of policy conditions relating to service in the armed forces. At the option of the insurer, provisions relating to benefits for total and permanent disability and additional benefits for accidental death may also be excepted[.]

New York Insurance Law § 3203(b)(1) provides:

A life insurance policy delivered or issued for delivery in this state may exclude or restrict liability in the event of death occurring while the insured is resident in a specified foreign country or countries, but shall not contain any provision excluding or restricting liability in the event of death caused in a certain specified manner, except as a result of: . . . (B) suicide within two years from the date of issue of the policy[.]

In order to prevent unfair discrimination, New York Insurance Law § 4224(a) (McKinney 2000 and 2003 Supplement) provides:

No life insurance company doing business in this state . . . shall: (1) make or permit any unfair discrimination between individuals of the same class and of equal expectation of life, in the amount or payment or return of premiums, or rates charged for policies of life insurance or annuity contracts, or in the dividends or other benefits payable thereon, or in any of the terms and conditions thereof; . . . (3) knowingly permit, . . . or make, any policy of life insurance or annuity contract or agreement as to such policy or contract other than as plainly expressed in the policy or contract.

Any policy of individual life insurance must contain a contestability clause of two years or less or indicate that that the policy is incontestable from date of issue. Similarly, any policy of individual life insurance may contain a suicide exclusion provision of two years or less. Since the suicide exclusion clause, New York Insurance Law § 3203(b)(1), is not required, the Department could approve a policy form without the clause.

Regulation 60, N.Y. Comp. Codes R. & Regs. tit. 11, § 51.2(a) (1998) defines:

The term ‘replacement of a life insurance policy’ . . . as used in this Part means, except as exempted in Section 51.3 of this Part, that a new life insurance or new annuity contract are to be purchased and delivered or issued for delivery in New York and it is known to the Department licensee that, as part of the transaction, existing life insurance policies or annuity contracts have been or are likely to be: (1) Lapsed, surrendered, partially surrendered, forfeited, assigned to the insurer replacing the life insurance policy or annuity contract, or otherwise terminated[.]

Regulation 60, N.Y. Comp. Codes R. & Regs. tit. 11, § 51.3 (1998) provides:

This Part shall not apply when: . . . (b) A policy change customarily granted by the insurer is being exercised, provided such change results in no additional surrender or expense charge or suicide or contestable restrictions, and only to the extent such change is approved by the Superintendent of Insurance[.]

Regulation 60, N.Y. Comp. Codes R. & Regs. tit. 11, § 51.6(b) provides:

Where a replacement has occurred or is likely to occur, the insurer replacing the life insurance policy or annuity contract shall: . . . (8) Treat the proposed life insurance policy . . . in all respects as if it were a new issuance of the life insurance policy . . . subject to no differences in underwriting or in other considerations . . . .This provision, however, shall not prevent an insurer from paying lower compensation or expenses to agents and or brokers on the proposed life insurance policy or annuity contract.

Since N.Y. Comp. Codes R. & Regs. tit. 11, § 51.6(b)(8) requires an insurer in a replacement situation to treat the proposed policy in all respects as if it were a new policy, subject to no differences in underwriting or in other considerations, a waiver of the suicide and incontestability clauses would not be permissible. However, N.Y. Comp. Codes R. & Regs. tit. 11, § 51.3(b) does provide for an exemption from the requirements of Regulation 60, if a policy change customarily granted is being exercised and there are no additional surrender or expense charges or suicide or contestable restrictions, and only to the extent that such change is approved by the Superintendent. The Department has previously allowed, on a class basis, in accordance with N.Y. Comp. Codes R. & Regs. tit. 11, § 51.3(b), a waiver of contestable and suicide clauses, when a usual policy change is being implemented, and there are no additional surrender or expense charges.

In the case at issue, unless the insurer has obtained approval from the Department for an exemption from the requirements of Regulation 60 pursuant to N.Y. Comp. Codes R. & Regs. tit. 11, § 51.3(b), any waiver of the suicide and incontestability clauses would be contrary to Regulation 60. Any waiver by the insurer of the suicide or incontestability clauses on an individual basis for a client would constitute a violation of New York Insurance Law § 4224.

For further information you may contact Principal Attorney Alan Rachlin at the New York City Office.