The Office of General Counsel issued the following opinion on February 7, 2006, representing the position of the New York State Insurance Department.
Re: Applicability of Regulation 60 to Subsequent Transfers of Funds
If (1) a partial transfer of funds from an existing life insurance policy (Policy A) is used to establish a new annuity contract (Annuity A), (2) all required N.Y. Comp. Codes R. & Regs. tit. 11, Pt. 51 (2003) ("Regulation 60") paperwork is completed for the initial transfer of assets, (3) Annuity A subsequently receives a second transfer of funds from Policy A, and (4) the assets of Annuity A are further enhanced by a third transfer of all funds from another existing annuity contract (Annuity B), does Regulation 60 require the completion of further Regulation 60 paperwork for the second and third fund transfers?
Regulation 60 requires completion of Regulation 60 paperwork when it is known to the Department licensee that the new life insurance or new annuities to be purchased would, or are likely to, replace existing life insurance or annuities except as exempted in Section 51.3.
Regulation 60 governs "the acts and practices of insurers, agents, brokers and other licensees of the Insurance Department with respect to the internal and external replacement of life insurance policies and annuity contracts." Regulation 60, § 51.1(a).
Section 51.2 of Regulation 60 defines the term "replacement of a life insurance policy or an annuity contract" as follows:
(a) The term replacement of a life insurance policy or an annuity contract as used in this Part means, except as exempted in section 51.3 of this Part, that new life insurance or new annuities 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;
(2) changed or modified into paid-up insurance; continued as extended term insurance or under another form of nonforfeiture benefit; or otherwise reduced in value by the use of nonforfeiture benefits, dividend accumulations, dividend cash values or other cash values;
(3) changed or modified so as to effect a reduction either in the amount of the existing life insurance or annuity benefit or in the period of time the existing life insurance or annuity benefit will continue in force;
(4) reissued with a reduction in amount such that any cash values are released, including all transactions wherein an amount of dividend accumulations or paid-up additions is to be released on one or more of the existing policies;
(5) assigned as collateral for a loan or made subject to borrowing or withdrawal of any portion of the loan value, including all transactions wherein any amount of dividend accumulations or paid-up additions is to be borrowed or withdrawn on one or more existing policies; or
(6) continued with a stoppage of premium payments or reduction in the amount of premium paid. (Emphasis added).
As stated in the regulation, Regulation 60 governs the actions of the Departments licensees when a replacement of insurance policies or annuity contracts takes place. A prior opinion of the Department stated that Regulation 60 would be triggered for all subsequent transfers of funds from an existing life insurance policy to an annuity contract after Regulation 60 paperwork had been completed for the initial transfer of assets to establish the annuity contract regardless of whether the licensee knew that the new life insurance or new annuity would replace an existing life insurance policy or an annuity contract. Upon reconsideration of this issue, the Department has withdrawn that opinion. It is our view that with respect to subsequent transfers of life insurance or annuities, Regulation 60 applies where it is known to the Department licensee that the new life insurance or new annuities to be purchased would, or are likely to, replace an existing life insurance policy or an annuity contract, except as exempted in § 51.3.
While § 51.7 of Regulation 60 recognizes that a replacement may legitimately occur where it was not anticipated when the application was taken for the new policy, a pattern of replacement may be evidence of the licensees intent to violate the Regulation. Section 51.7 provides:
(c) Although policyholders and contractholders have the right to replace existing life insurance policies or annuity contracts after having indicated in or as a part of an application for new coverage that such was not their intention, patterns of such action by policyholders or contractholders having the same agent or broker shall be deemed prima facie evidence of the agents or brokers knowledge that replacement was intended in connection with such transactions, and such patterns of action shall be deemed prima facie evidence of the agents or brokers intent to violate this Part. (Emphasis added).
Thus, transactions may not be structured to avoid or circumvent the intent of the Regulation.
This opinion supersedes any prior opinions on this issue, including the opinion of June 7, 2005.
For further information please contact Deputy Superintendent and General Counsel Audrey M. Samers at the New York City Office