The Office of General Counsel issued the following opinion on February 3, 2006, representing the position of the New York State Insurance Department.
Re: Applicability of N.Y. Ins. Law § 4232(b) to Traditional Participating Life Policies
1. Is N.Y. Ins. Law § 4232(b) (McKinney 2000) applicable to traditional participating life insurance policies?
2. Are dividends the same as additional amounts credited?
3. Is a life insurance policy that is participating but pays no dividends subject to N.Y. Ins. Law §§ 4231, 4232(b) or both?
1. Generally, N.Y. Ins. Law § 4232(b) (McKinney 2000) does not apply to traditional participating life insurance policies. However, if a traditional life policy is designed to provide for the crediting of additional amounts, then Section 4232(b) would apply.
2. No. Dividends, which are based on prior years experience (retrospective), are not additional amounts. Additional amounts are based on future expected experience, and hence are prospective in nature.
3. A policy that is participating but pays no dividends is subject to N.Y. Ins. Law § 4231. The policy would also be subject to N.Y. Ins. Law § 4232(b) only if it credits additional amounts.
The inquiry is general in nature.
As a preliminary matter, the inquirer asks several general questions without presenting any detailed facts. As a result, this opinion will be general in nature. Its applicability to a policy design or structure, which may be innovative or unique, would be separately considered by the Department upon the presentation of specific facts.
The inquirer asks whether N.Y. Ins. Law § 4232(b) (McKinney 2000) is applicable to traditional participating life insurance policies. N.Y. Ins. Law § 4232(b) (McKinney 2000) provides, as follows:
(b)(1) Any individual life insurance policy may provide that in addition to any minimum benefits guaranteed in the policy, additional amounts may be credited to the policy.
(2) No such additional amounts shall be guaranteed or credited except upon reasonable assumptions as to investment income, mortality, persistency, and expenses. The declaration of such additional amounts by an insurer must be made prospectively; no such additional amounts shall be credited retroactively to apply to any period prior to such declaration.
(3) Such additional amounts are required to be credited to any policy, providing for the crediting of additional amounts, while continued under a reduced paid-up insurance option, with respect to the period after the termination or lapse of such policy by reason of default in payment of any premium, installment or interest on any policy loan and before the reinstatement of such policy, if it is reinstated. However, an insurer may use reasonable assumptions as to investment income, mortality, persistency, and expenses which differ from the assumptions used for policies in force on a premium paying basis.
(4) Any such additional amounts shall be credited on a basis equitable to all policyholders of a given class and shall be based on written criteria approved by the board of directors of the company or a committee thereof.
Section 4232 provides for the crediting of additional amounts. Section 4232(b)(3) provides that "[s]uch additional amounts are required to be credited to any policy providing for the crediting of additional amounts ." (emphasis added). Therefore, if a traditional participating life policy is designed to provide for the crediting of additional amounts, Section 4232(b) would also apply.
N.Y. Ins. Law § 4231 (McKinney 2000), entitled Policyholders Participation in Surplus of Life Insurance Companies, addresses the distribution of dividends by insurers out of their surplus at years end. That Section provides, in pertinent part, as follows:
(a)(1) Except as herein otherwise provided, every domestic life insurance company shall ascertain and distribute annually, and not otherwise, the proportion of any surplus accruing upon every participating insurance policy and annuity or pure endowment contract entitled as hereinafter provided to share therein .
(a)(2) Upon the thirty-first day of December of each year, or as soon thereafter as practicable, every such company shall ascertain the surplus earned by it during such year.
(a)(3) After setting aside from such surplus such sums as may be required and such sums as may be deemed advisable for the accumulation of a surplus not in excess of the maximum prescribed in this chapter, every such company shall thereupon apportion the remainder of such earnings, if any, derived from participating policies and contracts, equitably to all policies or contracts entitled to share therein during the full dividend year adopted by the company for such purpose .
Section 4231 specifically applies to participating life insurance policies, including traditional participating life insurance policies. In accordance with Section 4231(a)(2), dividends are retrospective in nature because they are based on the insurers prior experience, specifically its earned surplus. Pursuant to section 4231(a)(3), participating life insurance policies may pay dividends, although dividends are not guaranteed. Though not guaranteed, most participating policies are expected to pay dividends. However, some participating policies are structured or priced in such a manner that dividends are not expected.
The inquirer also asks whether dividends are the same as additional amounts. Section 4232(b)(2) states that the declaration of such additional amounts by an insurer must be made prospectively and that no such additional amounts shall be credited retroactively to apply to any period prior to such declaration. Additional amounts, as opposed to dividends, are prospective in nature in that they are based on the insurers future expected experience. A dividend is, therefore, not an "additional amount."
Finally, the inquirer asks whether a policy that is participating but pays no dividend is subject to Sections 4231, 4232(b) or both. As described in Section 4231(a)(3), Section 4231 applies to participating policies whether they pay dividends or not. Thus, the above analysis of sections 4231 and 4232(b) is the same whether a participating policy pays dividends or does not pay dividends.
For further information please contact Associate Attorney D. Monica Marsh at the New York City Office.