The Office of General Counsel issued the following opinion on August 29, 2007 representing the position of the New York State Insurance Department.
RE: Applicability of Regulation 60 to an Exchange of a Matured Endowment Contract
Must a producer comply with the application requirements contained in 11 NYCRR Part 51 (Regulation 60) in the case of an exchange of a matured endowment contract?
No. The application requirements set forth in Regulation 60 do not apply in the case of an exchange of a matured endowment contract.
A client of a producer owns an endowment contract that is fully matured. The guaranteed cash surrender value of the contract is now equal to the death benefit payable. The client would like to make a tax-free exchange pursuant to Internal Revenue Code § 1035 of the contract’s cash value for a tax deferred annuity with another insurer.
Regulation 60 imposes procedures that an insurance agent or broker must follow in connection with certain replacements of life insurance policies and annuity contracts. Regulation 60 defines “replacement of a life insurance policy or an annuity contract”, in pertinent part, 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; ...
11 NYCRR § 51.2(a).
It is asserted that the proposed exchange does not constitute a replacement of a life insurance policy or annuity as defined by Regulation 60 because the matured endowment contract1 is not a life insurance policy. The Department concurs.
New York Ins. Law § 1101(a) (McKinney 2006) defines “insurance contract” as follows:
(1) "Insurance contract" means any agreement or other transaction whereby one party, the "insurer", is obligated to confer benefit of pecuniary value upon another party, the insured" or "beneficiary", dependent upon the happening of a fortuitous event in which the insured or beneficiary has, or is expected to have at the time of such happening, a material interest which will be adversely affected by the happening of such event.
The endowment contract that the client seeks to exchange does not conform to the definition of “insurance contract” set forth above in that the contract has matured. Thus, there is no “benefit of pecuniary value” that will be conferred upon the contract owner upon the occurrence of any “fortuitous event” (i.e., the client’s death). Because the endowment contract has matured and no longer meets the definition of an insurance contract, its exchange is not covered by the requirements imposed by Regulation 60, which, by its terms, applies only to replacements of life insurance policies and annuity contracts. The proposed exchange is more closely analogous to a disposition of assets held by an insurer under a settlement option than it is to an exchange of a policy.
Nevertheless, in the situation presented, a producer is under the duty to act at all times in the best interest of the client. Here, the client intends to purchase a deferred annuity with the proceeds from the endowment contract. Generally, deferred annuities have surrender charges in the early years of the contract. A producer in this situation thus must ensure that the sale of the deferred annuity will be appropriate and suitable to the client’s needs and particular circumstances.
For further information you may contact Supervising Attorney Michael Campanelli at the New York City Office.
1 An endowment policy or contract typically matures when the named insured attains a specified age or after a certain term of years has elapsed. Under an endowment contract, the face amount (which, under a term or whole life insurance policy, is the amount paid out only upon the insured’s death) is payable at the age identified in the endowment contract if the insured remains alive. Under an endowment contract, once the insured attains the specified age (or once the specified term of years has elapsed), the insured is entitled to receive the face amount and there is no longer any death benefit payable; rather, the contract is terminated. If the insured dies prior to the contract’s maturity, a death benefit equal to the face amount is payable to the contract’s beneficiary. See The Law of Life and Health Insurance §1.03 (Matthew Bender 2005).