NEW YORK STATE
REGULATION NO. 74
(11 NYCRR 53)
Life and Annuity Cost Disclosure and Sales Illustrations
I, Neil D. Levin, Superintendent of Insurance of the State of New York, pursuant to the authority granted by Section 301 of the Insurance Law of the State of New York, do hereby repeal Part 53 of Title 11 of the Official Compilation of Codes, Rules and Regulations of the State of New York (Regulation 74) promulgated on December 30, 1982, and in place thereof, and pursuant to Sections 201, 301, 308, 1313, 2123, 2208, 2405, 3201, 3203, 3209, 3219, 3222, 4221, 4223, 4226, 4231, 4232, 4240, 4510, 4511, 4513 and 4518 of the Insurance Law and Section 263 of the Banking Law of the State of New York, do hereby promulgate the following new Part 53 and its Subparts 53-1, 53-2 and 53-3 of Title 11 of the Official Compilation of Codes, Rules and Regulations of the State of New York (Regulation 74), to take effect upon publication in the State Register.
Subpart 53-1 General Provisions
Subpart 53-2 Disclosure Requirements
Subpart 53-3 Life Illustrations and Reports
Section 53-1.1 Purpose. The purposes of this Part are:
(a) to establish rules for the content and format of sales illustrations for life insurance policies, annuity contracts, variable life insurance policies, variable annuity contracts and individual funding agreements in accordance with Section 3209(k) of the Insurance Law;
(b) to define in accordance with Section 3209(k) the preliminary information and the information to appear in the policy summary including specimen values of fund accumulation and cash surrender values for the life insurance policies subject to Section 4232(b) of the Insurance Law;
(c) to define in accordance with Section 3209(k) of the Insurance Law the contents of illustrations for life insurance policies which can serve as the preliminary information and policy summary information as authorized by Section 3209(l) of the Insurance Law;
(d) to prescribe rules with respect to the calculation of life insurance cost indexes and the equivalent level annual dividend referred to in subsections (d) and (e) of Section 3209 of the Insurance Law;
(e) to prescribe in accordance with Section 3209(c) of the Insurance Law guidelines pursuant to which insurers may charge policyholders a reasonable fee for the preparation of a policy summary for in-force premium paying policies for which no policy summary has ever been furnished; and,
(f) to establish pursuant to Section 3209(k) additional disclosure rules for certain graded death benefit life insurance policies issued to individuals age 50 to 75 on the basis of minimal or no underwriting.
Section 53-1.2 Applicability.
This Part shall apply to all insurers, fraternal benefit societies, and life insurance departments of savings banks licensed to do business in this State. This Part shall be applicable to any act of solicitation, negotiation or procurement of a life insurance policy or an annuity contract within the State including any act done by mail, telephone, electronic or any other method to present the information required by Section 3209 of the Insurance Law, and shall be applicable to any illustration presented in this State for the purpose of proposing to make a sale of a life insurance policy or an annuity contract.
Section 53-1.3 Definitions.
For purposes of this Part:
(a) "Actuarial Standards Board" means the board established by the American Academy of Actuaries to develop and promulgate standards of actuarial practice.
(b) "Cash dividend" means the current illustrated dividend which can be applied toward payment of the gross premium or paid in cash.
(c) "Cash value or cash surrender value", as it applies to participating life insurance or non-participating life insurance other than universal life insurance or variable life insurance, means at the end of any policy year, assuming required or illustrative premiums are paid to such time, the sum of the guaranteed or tabular cash value plus the value of any dividends, if any, less any indebtedness.
(d) "Contract" means any individual immediate annuity contract, individual deferred annuity contract, fraternal benefit immediate annuity certificate, fraternal benefit deferred annuity certificate, individual funding agreement or group deferred annuity certificate subject to Section 3219 and Section 4223 of the Insurance Law.
(e) "Contract premium" means the gross premium that is required to be paid under a fixed premium policy, including the premium for a rider for which benefits are shown in the illustration.
(f) "Contract surrender value" means the contract value less the surrender charge and any indebtedness.
(g) "Contract value", as it applies to annuity contracts, annuity certificates and funding agreements, means the gross consideration paid less any expense, mortality and administrative charges accumulated at the contract's credited interest rate.
(h) "Currently payable scale" means a scale of non-guaranteed elements in effect for a policy form as of the preparation date of the illustration or declared to become effective within the next ninety-five days.
(i) "Disciplined current scale" means a scale of non-guaranteed elements constituting a limit on illustrations currently being illustrated by an insurer that is reasonably based on actual recent historical experience, as certified annually by an illustration actuary designated by the insurer. Further guidance in determining the disciplined current scale as contained in standards established by the Actuarial Standards Board may be relied upon if the standards:
(1) are consistent with all provisions of this Part;
(2) limit a disciplined current scale to reflect only actions that have already been taken or events that have already occurred;
(3) do not permit a disciplined current scale to include any projected trends of improvements in experience or any assumed improvements in experience beyond the illustration date; and
(4) do not permit assumed expenses to be less than minimum assumed expenses.
(j) "Equivalent level death benefit" of a policy or term life insurance rider means the amount calculated as follows:
(1) Accumulate the guaranteed amount payable upon death, regardless of the cause of death, at the beginning of each policy year for 10 and 20 years at five percent interest compounded annually to the end of the 10th and 20th policy years respectively.
(2) Divide each accumulation of step (1) by an interest factor that converts it into one equivalent level annual amount that, if paid at the beginning of each year, would accrue to the value in step (1) over the respective periods stipulated in step (1). If the period is 10 years, the factor is 13.207 and if the period is 20 years, the factor is 34.719.
(k) "Generic name" means a short title descriptive of the policy being illustrated such as "whole life," "term life" or "flexible premium adjustable life".
(l) "Guaranteed elements" means the premiums, benefits, values, credits or charges under a policy of life insurance that are guaranteed and determined at issue.
(m) "Illustrated scale" means a scale of non-guaranteed elements currently being illustrated that is not more favorable to the policyowner than the lesser of:
(1) the disciplined current scale; or
(2) the currently payable scale.
(n) "Illustration" means a presentation or depiction that includes non-guaranteed elements of a policy of life insurance over a period of years and that is one of the three types defined below:
(1) "Basic illustration" means a ledger or proposal used in the sale of a life insurance policy that shows both guaranteed and non-guaranteed elements.
(2) "Supplemental illustration" means an illustration furnished in addition to a basic illustration that meets the applicable requirements of this Part, and that may be presented in a format differing from the basic illustration, but may only depict a scale of non-guaranteed elements that is permitted in a basic illustration.
(3) "In force illustration" means an illustration furnished at any time after the policy that it depicts has been in force for one year or more.
(o) "Illustration actuary" means an actuary meeting the requirements of Section 53-3.7 (c) of Subpart 53-3 who certifies to illustrations based on the standard of practice promulgated by the Actuarial Standards Board.
(p) "Indeterminate premium policy" means any life insurance policy described in Section 4231(g)(1)(D) of the Insurance Law.
(q) "Initial interest rate" means the rate in effect when the policy was issued.
(r) "Lapse-supported illustration" means an illustration of a policy form failing the test of self-supporting as defined in this Subpart, under a modified persistency rate assumption using persistency rates underlying the disciplined current scale for the first five years and 100 percent policy persistency thereafter.
(s) "Median Scale" means an insurers illustrated scale used but with the non-guaranteed elements reduced as follows:
(1) dividends at 50 percent of the dividends contained in the illustrated scale used;
(2) non-guaranteed credited interest at rates that are the average of the guaranteed rates and the rates contained in the illustrated scale used; and
(3) all non-guaranteed charges, including but not limited to, term insurance charges, mortality and expense charges, at rates that are the average of the guaranteed rates and the rates contained in the illustrated scale used.
(t) "Minimum assumed expenses" means the minimum expenses that may be used in the calculation of the disciplined current scale for a policy form. The insurer may choose to designate each year the method of determining assumed expenses for all policy forms from fully allocated expenses, marginal expenses and a generally recognized expense table approved by the Superintendent based on fully allocated expenses representing a significant portion of insurance companies. Marginal expenses may be used only if greater than a generally recognized expense table. If no generally recognized expense table is approved, fully allocated expenses must be used.
(u) "Non-guaranteed elements" means the premiums, benefits, values, credits or charges under a policy of life insurance that are not guaranteed or not determined at issue.
(v) "Non-term group life" means a group policy or individual policies of life insurance issued to members of an employer group or other permitted group where:
(1) every plan of coverage was selected by the employer or other group representative;
(2) some portion of the premium is paid by the group or through payroll deduction; and
(3) group underwriting or simplified underwriting is used.
(w) "Policy" means any life insurance policy issued by a life insurer, any life insurance certificate issued by a fraternal benefit society, or any life insurance policy issued by the life insurance department of a savings bank, including non-term group life insurance policies and other group life insurance policies marketed or sold using illustrations.
(x) "Policyowner" means the owner named in the policy or the certificateholder in the case of a group policy.
(y) "Policy Values" means the accumulation or account value of a life insurance policy subject to Section 4232(b) and, in respect to non-Section 4232(b) life insurance policies, such term shall mean the cash value of the policy and any dividend standing to the credit of a participating policy.
(z) "Premium outlay" means the amount of premium assumed to be paid by the policyowner or other premium payer out-of-pocket.
(aa) "Self-supporting illustration" means an illustration of a policy form for which it can be demonstrated that, when using experience assumptions underlying the disciplined current scale, for all illustrated points in time on or after the fifteenth policy anniversary or the twentieth policy anniversary for second-or-later-to-die policies (or upon policy expiration if sooner), the accumulated value of all policy cash flows equals or exceeds the total policyowner value available. For this purpose, policyowner value will include cash surrender values and any other illustrated benefit amounts available at the policyowners election.
(bb) "Total death benefit", as it applies to participating life insurance, means the sum of the death benefit provided by the policy, riders attached thereto, and the death benefits purchased by dividends.
Section 53-1.4 Enforcement.
(a) In addition to the requirements imposed by Section 53-3.5(e) of Subpart 53-3, each insurer shall maintain at its home or principal office, a complete file containing one specimen copy each of the preliminary information form, policy summary form, and sales illustrations authorized by the insurer for each policy form subject to this Part. Such files shall be subject to regular and periodic inspection by the Department. All such forms shall be maintained in said file for a period of either six years or until the filing of the next regular report on examination of the insurer, whichever is the longer period of time. Nothing herein shall be construed as affecting any retention period required by a statute other than the Insurance Law or preventing any insurer from retaining records for a longer period of time.
(b) Each insurer shall file with its annual statement to this Department a certificate of compliance executed by an authorized officer of the insurer wherein it is stated that to the best of such officer's knowledge, the preliminary information forms, policy benefit summaries, and sales illustrations disseminated by the insurer during the preceding statement year complied or were made to comply in all respects with the provisions of this Part.
Section 53-1.5 Penalties.
In addition to any other penalties provided by the laws of this State, a violation of this Part may be considered an unfair act or practice in the conduct of the business of insurance in this State and a violation of Section 2403 as well as a violation of Section 2123 or Section 4226 of the Insurance Law.
Section 53-1.6 Severability.
If any provision of this Part or its application to any person or circumstance is for any reason held to be invalid by any court of law, the remainder of the Part and its application to other persons or circumstances shall not be affected.
Section 53-2.1 Preliminary Information for Policies Subject to Section 4232(b) of the Insurance Law.
(a) The preliminary information shall be in writing and include, to the extent applicable, the following:
(1) the name and address of the insurance agent, or if no agent is involved, a statement of the procedure to be followed to receive responses to inquiries concerning the preliminary information;
(2) the full name and home office, administrative office or branch or agency office address of the insurer in whose name the life insurance policy is to be written;
(3) the date of the preliminary information and the generic name of the policy, the initial amount of insurance and the initial annual premium for the base policy and each rider, if applicable;
(4) a table of values and benefits based upon current, median and guaranteed policy cost factors for the base policy and any rider at the end of each of the first five policy years, the tenth policy year and at the end of the policy years in which the proposed insured attains age 65, 75, 85 and 95. These values may be shown on a per thousand or per unit basis;
(5) the year coverage will terminate based upon current, median and guaranteed policy cost factors. These values may be shown on a per thousand or per unit basis;
(6) the interest rate basis for each table of values based upon current, median and guaranteed policy cost factors;
(7) the effective policy loan annual percentage interest rate and whether this rate is applied in advance or in arrears, adjustable or fixed;
(8) acknowledgment that the potential purchaser understands that policy values, cash surrender values and death benefits based on current and median policy cost factors are not guaranteed and that any changes in the company's interest earnings, expenses or claim experience may result in lower or higher premium payments or lower or higher policy benefits;
(9) a statement advising the applicant that when the policy is issued, a complete policy summary including cost data, based on the benefits, premiums and dividends of the policy as issued will be furnished, and that, following the receipt of the policy and policy summary, there will be a period of not less than ten days within which the applicant may return the policy for an unconditional refund of the premium paid or the adjusted amount if such policy provides for a market-value adjustment pursuant to Section 3203(a)(11) of the Insurance Law; and
(10) life insurance cost indexes and the equivalent level annual dividend for the basic policy for 10 and 20 years, but in no case beyond the premium-paying period.
(b) The table of values and benefits based on guaranteed policy cost factors shall be labeled in a prominent manner "guaranteed" and the table of values and benefits based on current and median policy cost factors shall be labeled in a prominent manner "not guaranteed".
(c) The preliminary information shall be provided to the prospective purchaser at or prior to the time an application is taken and shall be signed and dated by the agent and the applicant and a copy of the preliminary information shall be attached to the application submitted to the insurer. Notwithstanding the foregoing, no applicant for life insurance shall be prevented or delayed in effecting or applying for coverage by the requirements of this Subpart. In such cases where prior to application it is impractical to provide any items prescribed by this Subpart, such items may be estimated in good faith or furnished as soon thereafter as practical prior to the delivery of policy.
Section 53-2.2 Policy Summary Information for Policies Subject to Section 4232(b) of the Insurance Law.
(a) A policy summary shall include the following:
(1) a prominently placed title as follows:
"STATEMENT OF POLICY COST AND BENEFIT INFORMATION";
(2) the name and address of the insurance agent, or, if no agent is involved, a statement of the procedure to be followed in order to receive responses to inquiries regarding the policy summary;
(3) the full name and home office, administrative office or branch or agency office address of the insurer in whose name the life insurance policy is to be or has been written;
(4) the generic name of the basic policy and each rider;
(5) tables for the first five policy years and every fifth year thereafter until the maturity date containing the following:
(i) the annual premium or annual planned premium for the basic policy;
(ii) the annual premium or annual planned premium or maximum cost of insurance rate for each rider;
(iii) the death benefit at the beginning of the policy year shown separately for the basic policy and each rider;
(iv) the policy value and cash surrender value at the end of each year with values shown separately for the basic policy and each rider;
(v) the death benefits, policy values and cash surrender values based on the annual premium or annual planned premium using the current, median and guaranteed policy cost factors;
(vi) the interest rate assumptions for each projection of policy values and death benefits based upon current, median and guaranteed policy cost factors;
(vii) the dates the policy will terminate based on the annual premium or annual planned premium and on the current, median and guaranteed policy cost factors; and,
(viii) the level annual premium from the issue date that would, based upon guaranteed policy cost factors, continue the policy to the maturity date.
(6) the effective policy loan annual percentage interest rate specifying whether this rate is applied in advance or arrears, adjustable or fixed, and if adjustable, the frequency at which such rate is to be determined and the index upon which the maximum rate is based at the time the policy is issued; and,
(7) the date on which the policy summary is prepared;
(8) life insurance cost indexes for 10 and 20 years but in no case beyond the premium-paying period. Separate indexes are to be displayed for the basic policy and each optional term life insurance rider. Such indexes need not be included for optional riders which are limited to benefits such as accidental death benefits, disability waiver of premium, preliminary term life insurance coverage of less than 12 months and guaranteed insurability benefits, nor for basic policies or optional riders covering more than one life;
(9) the equivalent level annual dividend, in the case of participating policies and participating optional term life insurance riders, under the same circumstances and for the same durations at which life insurance cost indexes are displayed;
(10) a policy summary which includes dividends shall also include a statement that dividends are based on the companys current dividend scale and are not guaranteed; in addition, the summary shall include a statement in close proximity to the equivalent level annual dividend as follows: "An explanation of the intended use of the equivalent level annual dividend is included in the buyers guide"; and
(11) a statement in close proximity to the life insurance cost indexes as follows: "AN EXPLANATION OF THE INTENDED USE OF THESE INDEXES IS PROVIDED IN THE BUYERS GUIDE".
(b) The table of values and benefits based on guaranteed policy cost factors shall be labeled in a prominent manner "guaranteed" and the table of values and benefits based on current and median policy cost factors shall be labeled in a prominent manner "not guaranteed".
(c) The annual planned premium used for each table shall be the actual planned premium selected by the applicant in the application without regard to any future unscheduled premium payments but may take into account any additional premium, in excess of the planned premium, paid with the application if identified separately in the application.
(d) The policy summary for life insurance policies which use a market-value adjustment formula in determining cash surrender benefits shall include the information required by Section 43.5 of Part 43 of this Title with an appropriate statement that the cash surrender value does not reflect any adjustment based on such formula.
(e) The policy summary shall be a separate document.
(f) If more than one insured is covered under the policy, other than a joint life policy, or any rider, death benefits shall be displayed separately for each insured or for each class of insureds if death benefits do not differ within the class.
Section 53-2.3 Additional Disclosure Rules for Graded Death Benefit Life Insurance Issued Between Ages 50 and 75.
(a) Preliminary Information.
(1) The prospective purchaser shall be provided with a prominent notice either on the application or with the application in the following form or in a form containing substantially similar information approved by the Superintendent:
"Since this policy is issued with minimal or no medical underwriting, the premium rate charged includes an extra mortality risk charge. If you are healthy enough to qualify as a "standard" risk, premiums would likely have been lower if you had applied for a fully underwritten policy."
(2) Such prominent notice may be included as part of a sales illustration summary, if such summary is adopted by the insurer as the preliminary information.
(b) Policy Summary.
(1) The policy summary shall include a comparison of the total aggregate of premiums payable and death benefits payable for the first seven policy years, tenth and twentieth policy year.
(2) The policy summary form shall include a prominent notice in the following form or in a substantially similar form approved by the Superintendent:
"This is a policy issued on the basis of minimal or no underwriting. The premium charged includes an extra mortality charge. If you are healthy enough to qualify for a "standard" life insurance policy, your premiums would likely have been lower if you had applied for a fully underwritten policy. You should carefully review this document to make sure the policy is suitable for you. If you are not entirely satisfied, please review the cancellation provision in the policy for directions on obtaining a refund of any premiums paid."
Section 53-2.4 Rules for the Calculation of the Life Insurance Surrender Cost Index.
(a) The Life Insurance Surrender Cost Index is calculated as follows:
(1) Determine the guaranteed cash surrender value, if any, available at the end of the 10th and 20th policy years.
(2) For participating policies, add the terminal dividend payable upon surrender, if any, to the accumulation of the annual cash dividends at five percent interest compounded annually to the end of the period selected and add this sum to the amount determined in step (1).
(3) Divide the result of step (2) (step (1) for guaranteed-cost policies) by an interest factor that converts it into an equivalent level annual amount that, if paid at the beginning of each year, would accrue to the value in step (2) (step (1) for guaranteed cost policies) over the respective periods stipulated in step (1).
If the period is 10 years, the factor is 13.207 and if the period is 20 years, the factor is 34.719.
(4) Determine the equivalent level premium by accumulating each annual premium payable for the basic policy or rider at five percent interest compounded annually to the end of the period stipulated in step (1) and dividing the result by the respective factors stated in step (3) (this amount is the annual premium payable for a level premium plan).
(5) Subtract the result of step (3) from step (4).
(6) Divide the result of step (5) by the number of thousands of the equivalent level death benefit to arrive at the life insurance surrender cost index.
Section 53-2.5 Rules for the Calculation of the Life Insurance Net Payment Cost Index.
The life insurance net payment cost index is calculated in the same manner as the comparable life insurance surrender cost index except that the cash surrender values and any terminal dividends are set at zero.
Section 53-2.6 Buyer's Guide.
No life insurance policy shall be delivered or issued for delivery in this state unless the prospective purchaser has been provided a copy of the Life Insurance Buyer's Guide set forth in Appendix 24A of this Part at the time specified in Section 3209(b)(1) of the Insurance Law. If the use of life insurance cost indexes is required by Section 3209, the Life Insurance Buyers Guide shall contain an explanation describing the use of such indexes set forth in Appendix 24B. A separate addendum for such explanation may be used which is provided at the time that the Buyers Guide is delivered.
LIFE ILLUSTRATIONS AND REPORTS
Section 53-3.1 Policies to be Illustrated.
(a) Except as otherwise provided, this Subpart shall apply to all policies other than variable life insurance policies, individual and group annuities, credit life insurance and life insurance policies with no illustrated death benefits on any individual exceeding $10,000.
(b) Each insurer marketing policies to which this Subpart is applicable shall notify the Superintendent whether a policy form is to be marketed with or without an illustration. For all policy forms being actively marketed on the effective date of this Subpart, the insurer shall identify in writing those forms and whether or not an illustration will be used with them. For policy forms filed after the effective date of this Subpart, the identification shall be made at the time of filing. Any previous identification may be changed by notice to the Superintendent.
(c) If the insurer identifies a policy form as one to be marketed without an illustration, any use of an illustration for any policy using that form prior to the first policy anniversary is prohibited.
(d) If a policy form is identified by the insurer as one to be marketed with an illustration, a basic illustration prepared and delivered in accordance with this Subpart is required, except that a basic illustration need not be provided to individual members of a group or to individuals insured under multiple lives coverage issued to a single applicant unless the coverage is marketed to these individuals. The illustration furnished an applicant for a group life insurance policy or policies issued to a single applicant on multiple lives may be either an individual or composite illustration representative of the coverage on the lives of members of the group or the multiple lives covered.
(e) Potential enrollees of non-term group life subject to this Subpart shall be furnished a quotation with the enrollment materials. The quotation shall show potential policy values for sample ages and policy years on a guaranteed and non-guaranteed basis appropriate to the group and the coverage. This quotation shall not be considered an illustration for purposes of this Subpart, but all information provided shall be consistent with the illustrated scale. A basic illustration shall be provided at delivery of the certificate to enrollees for non-term group life who enroll for more than the minimum premium necessary to provide pure death benefit protection. In addition, the insurer shall make a basic illustration available to any non-term group life enrollee who requests it.
Section 53-3.2 General Rules and Illustrations.
(a) An illustration used in the sale of a life insurance policy and subject to this Subpart shall satisfy the applicable requirements of this Subpart, be clearly labeled "life insurance illustration" and contain the following basic information:
(1) Name of insurer;
(2) Name and business address of producer or insurers authorized representative, if any;
(3) Name, age and sex of proposed insured, except where a composite illustration is permitted under this Subpart;
(4) Underwriting or rating classification upon which the illustration is based;
(5) Generic name of policy, the company product name, if different, and form number;
(6) Initial death benefit; and
(7) Dividend option election or application of non-guaranteed elements, if applicable.
(b) When using an illustration in the sale of a life insurance policy, an insurer or its producers or other authorized representatives shall not:
(1) Represent the policy as anything other than a life insurance policy;
(2) Use or describe non-guaranteed elements in a manner that is misleading or has the capacity or tendency to mislead;
(3) State or imply that the payment or amount of non-guaranteed elements is guaranteed;
(4) Use an illustration that does not comply with the requirements of this Subpart;
(5) Use an illustration that at any policy duration depicts policy performance more favorable to the policyowner than that produced by the illustrated scale of the insurer whose policy is being illustrated;
(6) Provide an applicant with an incomplete illustration;
(7) Represent in any way that premium payments will not be required for each year of the policy in order to maintain the illustrated death benefits, unless that is the fact;
(8) Use the term "vanish" or "vanishing premium", or a similar term that implies the policy becomes paid up, to describe a plan for using non-guaranteed elements to pay a portion of future premiums;
(9) Except for policies that can never develop nonforfeiture values, use an illustration that is "lapse-supported"; or
(10) Use an illustration that is not "self-supporting".
(c) If an interest rate used to determine the illustrated non-guaranteed elements is shown, it shall not be greater than the earned interest rate underlying the disciplined current scale.
(d) Pursuant to Sections 4231 and 4232 of the Insurance Law, no sales illustration, preliminary information form or policy summary shall depict a persistency bonus, a specified additional amount or specified reduction in mortality costs or expense costs in a specific policy year, after the first policy year, unless such bonus, additional amount or reduction is guaranteed in the contract or policy.
Section 53-3.3 Standards for Basic Illustrations.
(a) Format. A basic illustration shall conform with the following requirements:
(1) The illustration shall be labeled with the date on which it was prepared.
(2) Each page, including any explanatory notes or pages, shall be numbered and show its relationship to the total number of pages in the illustration (e.g., the fourth page of a seven-page illustration shall be labeled "page 4 of 7 pages").
(3) The assumed dates of payment receipt and benefit pay-out within a policy year shall be clearly identified.
(4) If the age of the proposed insured is shown as a component of the tabular detail, it shall be the issue age plus the numbers of years the policy is assumed to have been in force.
(5) The assumed payments on which the illustrated benefits and values are based shall be identified as premium outlay or contract premium, as applicable. For policies that do not require a specific contract premium, the illustrated payments shall be identified as premium outlay.
(6) Guaranteed death benefits and values available upon surrender, if any, for the illustrated premium outlay or contract premium shall be shown and clearly labeled guaranteed.
(7) If the illustration shows any non-guaranteed elements, they cannot be based on a scale more favorable to the policyowner than the insurers illustrated scale at any duration. These elements shall be clearly labeled non-guaranteed.
(8) The guaranteed elements, if any, shall be shown before corresponding non-guaranteed elements and shall be specifically referred to on any page of an illustration that shows or describes only the non-guaranteed elements (e.g., "see page one for guaranteed elements").
(9) The account or accumulation value of a policy, if shown, shall be identified by the name this value is given in the policy being illustrated and shown in close proximity to the corresponding value available upon surrender.
(10) The value available upon surrender shall be identified by the name the value is given in the policy being illustrated and shall be the amount available to the policyowner in a lump sum after deduction of surrender charges, policy loans and policy loan interest, as applicable.
(11) Illustrations may show policy benefits and values in graphic or chart form in addition to the tabular form.
(12) Any illustration of non-guaranteed elements shall be accompanied by a statement indicating that:
(i) the benefits and values are not guaranteed;
(ii) the assumptions on which they are based are subject to change by the insurer; and
(iii) actual results may be more or less favorable.
(13) If the illustration shows that the premium payer may have the option to allow policy charges to be paid using non-guaranteed values, the illustration must clearly disclose that a charge continues to be required and that, depending on actual results, the premium payer may need to continue or resume premium outlays. Similar disclosure shall be made for premium outlay of lesser amounts or shorter durations than the contract premium. If a contract premium is due, the premium outlay display shall not be left blank or show zero unless accompanied by an asterisk or similar mark to draw attention to the fact that the policy is not paid up.
(14) If the applicant plans to use dividends or policy values, guaranteed or non-guaranteed, to pay all or a portion of the contract premium or policy charges, or for any other purpose, the illustration may reflect those plans and the impact on future policy benefits and values.
(b) Narrative Summary. A basic illustration shall include the following:
(1) a brief description of the policy being illustrated, including a statement that it is a life insurance policy;
(2) a brief description of the premium outlay or contract premium, as applicable, for the policy. For a policy that does not require payment of a specific contract premium, the illustration shall show the premium outlay that must be paid to guarantee coverage for the term of the contract, subject to maximum premiums allowable to qualify as a life insurance policy under the applicable provisions of the Internal Revenue Code;
(3) a brief description of any policy features, riders or options, guaranteed or non-guaranteed, shown in the basic illustration and the impact they may have on the benefits and values of the policy;
(4) identification and a brief definition of column headings and key terms used in the illustration; and
(5) a statement containing in substance the following: "This illustration assumes that the currently illustrated non-guaranteed elements will continue unchanged for all years shown. This is not likely to occur, and actual results may be more or less favorable than those shown."
(c) Numeric Summary.
(1) Following the narrative summary, a basic illustration shall include a numeric summary of the death benefits and values and the premium outlay and contract premium, as applicable. For a policy that provides for a contract premium, the guaranteed death benefits and values shall be based on the contract premium. Except as provided in subdivision (g) of this Section, this summary shall be shown for at least policy years 5, 10 and 20 and at age 70, if applicable, on the three bases shown below. For multiple life policies the summary shall show policy years 5, 10, 20 and 30. The three bases are as follows:
(i) Policy guarantees;
(ii) Insurers illustrated scale;
(iii) Insurers illustrated scale used but with the non-guaranteed elements reduced as follows:
(a) Dividends at 50 percent of the dividends contained in the illustrated scale used;
(b) Non-guaranteed credited interest at rates that are the average of the guaranteed rates and the rates contained in the illustrated scale used; and
(c) All non-guaranteed charges, including but not limited to, term insurance charges, mortality and expense charges, at rates that are the average of the guaranteed rates and the rates contained in the illustrated scale used.
(d) If coverage would cease prior to policy maturity or age 100, the year in which coverage ceases shall be identified for each of the three bases.
(d) Statements. Statements substantially similar to the following shall be included on the same page as the numeric summary and signed by the applicant, or the policyowner in the case of an illustration provided at time of delivery, as required in this Subpart.
(1) A statement to be signed and dated by the applicant or policyowner reading as follows: "I have received a copy of this illustration and understand that any non-guaranteed elements illustrated are subject to change and could be either higher or lower. The agent has told me they are not guaranteed."
(2) A statement to be signed and dated by the insurance producer or other authorized representative of the insurer reading as follows: "I certify that this illustration has been presented to the applicant and that I have explained that any non-guaranteed elements illustrated are subject to change. I have made no statements that are inconsistent with the illustration."
(e) Tabular Detail.
(1) A basic illustration shall include the following for at least each policy year from one to ten and for every 5th policy year thereafter ending at age 100, policy maturity or final expiration; and except for term insurance beyond the 20th year, for any year in which the premium outlay and contract premium, if applicable, is to change:
(i) the premium outlay and mode the applicant plans to pay and the contract premium, as applicable;
(ii) the corresponding guaranteed death benefit, as provided in the policy; and
(iii) the corresponding guaranteed value available upon surrender, as provided in the policy.
(2) For a policy that provides for a contract premium, the guaranteed death benefit and value available upon surrender shall correspond to the contract premium.
(3) Non-guaranteed elements may be shown if described in the policy. In the case of an illustration for a policy on which the insurer intends to credit terminal dividends, they may be shown if the insurers current practice is to pay terminal dividends. If any non-guaranteed elements are shown, they shall be shown at the same durations as the corresponding guaranteed elements, if any. If no guaranteed benefit or value is available at any duration for which a non-guaranteed benefit or value is shown, a zero shall be displayed in the guaranteed column.
(f) An illustration for a policy that has a contract premium and which shows a premium outlay based on current or median policy cost factors or current or median dividend scales which permits a suspension of premium payments prior to the maturity or final expiration date shall be presented only in conjunction with another illustration setting forth a continuous premium payment pattern based on current, median and guaranteed policy cost factors or based on current, median and zero dividend scales for the contract premium. As one alternative, an insurer may utilize a single basic illustration showing a suspension of premium if the numeric summary shows premium payments payable to a specific policy year on a current, median and guaranteed basis. As a second alternative, the insurer may use a single basic illustration depicting the full contract premium being paid for the period required under the policy with both a full pay and abbreviated-pay values included in the numeric summary. As a third alternative, an insurer may elect to use a disclosure document, in conjunction with the supplemental illustration, to be signed by the agent and the applicant, which explains in narrative form that: the requirements to pay policy premiums are not canceled, forgiven or waived; the operation of the suspension of premiums is contingent upon current non-guaranteed factors remaining unchanged, which may or may not occur; a brief description of the factors; and hypothetical examples for issue age 50 with reduction in the current non-guaranteed factors of 25% and 50% as well as an example which shows the need to continue premium payments in order to maintain the policy in force beyond the illustrated premium suspension date.
In addition, the insurer shall provide with any illustration showing a suspension of premium:
(1) a statement displayed in a prominent manner that this illustration is not for a Paid-Up Policy or a Guaranteed Limited Premium Payment Policy;
(2) for a fixed premium policy subject to Section 4232(b) of the Insurance Law, disclosure that the policy, after suspension, continues to require monthly cost of insurance and expense charges, and interest credits, but any changes in current policy cost factors may result in a need to continue premium payments or to resume premium payments, which may be greater than the initial annual premium; or
(3) for a participating policy, disclosure that future dividends may be less than those illustrated which may result in the need to continue premium payments or resume premium payments after an initial suspension of such premium payments.
(g) The numeric summary for a policy subject to Section 4232(b) of the Insurance Law and a cash value policy providing three basic components consisting of a base policy, a paid-up additions element and a term insurance element shall show, in addition to the policy durations set forth in subdivision (c), policy duration at age 85 and age 90 of the insured.
(h) An illustration for a joint and last survivor policy which, if applicable, provides for an adjustment in cash value on the first death shall assume that death occurs at the later of age 75 of the older insured or 10 years from the issue date of the policy. Otherwise, an illustration for a joint and last survivor policy for the purposes of the basic illustration, including the numeric summary, may use the younger age or the older age.
(i) Pension Maximization.
(1) All illustrations of a life insurance policy with the use of life insurance proceeds to purchase a single premium immediate annuity in order to maximize periodic annuity income payments under a qualified or non-qualified employee welfare benefit plan as defined under the Employee Retirement Income Security Act of 1974 shall contain the following information:
(i) in addition to the information required for the life insurance policy by this Subpart, such illustration shall state the monthly annuity income for a life annuity option on both a current annuity purchase rate basis and on the guaranteed annuity purchase rate basis set forth in the life insurance policy;
(ii) the assumed date of death under the life policy for illustration purposes shall be the later of the 10th policy anniversary or the policy year that the proposed insured attains age 75;
(iii) such illustration shall prominently state that any annuity income amount is not guaranteed;
(iv) such illustration shall prominently disclose that the amounts of actual annuity income depends on the amount of life insurance proceeds applied towards the purchase of the annuity, the date of death of the insured, the annuity option selected and the annuity purchase rate which is based upon prevailing interest rates and life expectancy of the annuitant/beneficiary; and,
(v) such illustration shall state that the plan depends upon the life insurance policy being maintained to the date of death of the insured at a premium that may not be guaranteed.
(2) If the life insurance policy does not provide guaranteed annuity income optional settlement purchase rates, such illustration shall provide in addition to any current single premium annuity purchase rates, a hypothetical purchase rate based upon three percent interest and the 1983 Annuity Mortality Table.
(3) The sales illustration summary required for the life insurance policy by this Subpart shall be appropriately modified to disclose the amount of monthly annuity income as determined above and appropriately captioned "Not Guaranteed".
(4) All illustrations shall use a monthly life annuity income option.
Section 53-3.4 Standards for Supplemental Illustrations.
(a) A supplemental illustration may be provided so long as:
(1) it is appended to, accompanied by or preceded by a basic illustration that complies with this Subpart;
(2) the non-guaranteed elements shown are not more favorable to the policyowner than the corresponding elements based on the scale used in the basic illustration;
(3) it contains the same statement required of a basic illustration that non-guaranteed elements are not guaranteed; and
(4) for a policy that has a contract premium, the contract premium underlying the supplemental illustration is equal to the contract premium shown in the basic illustration. For policies that do not require a contract premium, the premium outlay underlying the supplemental illustration shall be equal to the premium outlay shown in the basic illustration.
(b) The supplemental illustration shall include a notice referring to the basic illustration for guaranteed elements and other important information.
Section 53-3.5 Delivery of Illustration and Record Retention.
(a) If a basic illustration is used by an insurance producer or other authorized representative of the insurer in the sale of a life insurance policy and the policy is applied for as illustrated, a copy of that illustration, signed in accordance with this Subpart, shall be submitted to the insurer at the time of policy application. A copy also shall be provided to the applicant. If the policy is issued other than as applied for, a revised basic illustration conforming to the policy as issued shall be sent with the policy. The revised illustration shall conform to the requirements of this Subpart, shall be labeled "Revised Illustration" and shall be signed and dated by the applicant or policyowner and producer or other authorized representative of the insurer no later than the time the policy is delivered. A copy shall be provided to the insurer and the policyowner.
(b) If no illustration is used by an insurance producer or other authorized representative of the insurer in the sale of a life insurance policy or if the policy is applied for other than as illustrated, the producer or representative shall certify to that effect in writing on a form provided by the insurer. On the same form the applicant shall acknowledge that no illustration conforming to the policy applied for was provided and shall further acknowledge an understanding that an illustration conforming to the policy as issued will be provided no later than at the time of policy delivery. This form shall be submitted to the insurer at the time of policy application. If the policy is issued, a basic illustration conforming to the policy as issued shall be sent with the policy and signed no later than the time the policy is delivered. A copy shall be provided to the insurer and the policyowner.
(c) If the basic illustration or revised illustration is sent to the applicant or policyowner by mail from the insurer, it shall include instructions for the applicant or policyowner to sign the duplicate copy of the numeric summary page of the illustration for the policy issued and return the signed copy to the insurer. It is not necessary to obtain the signature of the agent or producer. The insurers obligation under this Subpart shall be satisfied if it can demonstrate that it has made a diligent effort to secure a signed copy of the numeric summary page. The requirement to make a diligent effort shall be deemed satisfied if the insurer includes in the mailing a self-addressed postage prepaid envelope with instructions for the return of the signed numeric summary page.
(d) Such basic illustration or revised illustration shall satisfy the requirements for preliminary information required under Section 3209(d) of the Insurance Law and Section 53-2.1 of this Part, and the requirements for the policy summary required under Section 3209(e) of the Insurance Law and Section 53-2.2 of this Part if delivered to the applicant or policyowner in conformance with this Subpart.
(e) A copy of the basic illustration and a revised basic illustration, if any, signed as applicable, along with any certification that either no illustration was used or that the policy was applied for other than as illustrated, shall be retained by the insurer until the later of six years after the policy is no longer in force or the next scheduled examination by the Department. A copy need not be retained if no policy is issued.
Section 53-3.6 Annual Report; Notice to Policy Owners.
(a) In the case of a policy designated as one for which illustrations will be used, the insurer shall provide each policyowner with an annual report on the status of the policy that shall contain at least the following information:
(1) For policies subject to Section 4232(b) of the Insurance Law, the report shall include the following:
(i) the beginning and end date of the current report period;
(ii) the policy value at the end of the previous report period and at the end of the current report period;
(iii) the total amounts that have been credited or debited to the policy value during the current report period, identifying each by type (e.g., interest, mortality, expense and riders);
(iv) the current death benefit at the end of the current report period on each life covered by the policy;
(v) the net cash surrender value of the policy as of the end of the current report period;
(vi) the amount of outstanding loans, if any, as of the end of the current report period; and
(vii) a notice in the report for fixed premium policies, when applicable, that the policys net cash surrender value is such that it would not maintain insurance in force until the end of the next reporting period assuming guaranteed issue, mortality, and expense loads; or
(viii) a notice, in the report for flexible premium policies, when applicable, that the policys net cash surrender value will not maintain insurance in force until the end of the next reporting period unless further premium payments are made assuming guaranteed interest, mortality and expense loads.
(2) For all other policies, where applicable:
(i) current death benefit;
(ii) annual contract premium;
(iii) current cash surrender value;
(iv) current dividend;
(v) application of current dividend; and
(vi) amount of outstanding loan.
(3) Insurers writing life insurance policies that do not build nonforfeiture values shall only be required to provide an annual report with respect to these policies for those years when a change has been made to non-guaranteed policy elements by the insurer.
(b) If the annual report does not include an in force illustration, it shall contain the following notice displayed prominently: "IMPORTANT POLICY OWNER NOTICE: You should consider requesting more detailed information about your policy to understand how it may perform in the future. You should not consider replacement of your policy or make changes in your coverage without requesting a current illustration. You may annually request, without charge, such an illustration by calling [insurers phone number], writing to [insurers name] at [insurers address] or contacting your agent. If you do not receive a current illustration of your policy within 30 days from the date of your request, you should contact your state insurance department." The insurer may vary the sequential order of the methods for obtaining an in force illustration.
(c) Upon the request of the policyowner, the insurer shall furnish an in force illustration of current and future benefits and values based on the insurers present
illustrated scale. This illustration shall comply with the requirements of Sections 53-3.2(a), 53-3.3(a) and 53-3.3(e) of this Subpart. No signature or other acknowledgment of receipt of this illustration shall be required.
(d) If an adverse change in non-guaranteed elements that could affect the policy has been made by the insurer since the last annual report, the annual report shall contain a notice of that fact and the nature of the change prominently displayed.
(e) Every insurer shall provide, to any insured who so requests, a policy summary for each in-force premium paying policy for which no policy summary has ever been furnished but excluding policies for which an illustration has been provided in lieu of a policy summary pursuant to Section 53-3.5(d) of this Subpart. The insurer may charge the insured a reasonable fee for preparation of this summary, not to exceed five dollars. The Superintendent, in his discretion, may permit the insurer to charge a higher amount if the insurer can demonstrate in a manner satisfactory to the Superintendent that the actual cost of preparing such policy summary exceeds five dollars.
Section 53-3.7 Annual Certifications.
(a) The board of directors of each insurer shall appoint one or more illustration actuaries.
(b) The illustration actuary shall certify that the disciplined current scale used in illustrations is in conformity with the Actuarial Standard of Practice No. 24 for Compliance with the NAIC Model Regulation on Life Insurance Illustrations promulgated by the Actuarial Standards Board, and that the illustrated scales used in insurer-authorized illustrations meet the requirements of this Subpart. A copy of Actuarial Standard of Practice No. 24 as adopted by the Actuarial Standards Board in December of 1995 may be obtained from the American Academy of Actuaries, 1100 Seventeenth Street NW, Washington, DC 20036 and a copy is available for public inspection at the Insurance Department offices at Agency Bldg. One, Empire State Plaza, Albany, New York and at 25 Beaver Street, New York, New York and at the New York Department of State, 41 State Street, Third Floor, Albany, New York 12231.
(c) The illustration actuary shall:
(1) be a member in good standing of the American Academy of Actuaries;
(2) be familiar with the standard of practice regarding life insurance policy illustrations;
(3) not have been found by the Superintendent, following appropriate notice and hearing to have:
(i) violated any provision of, or any obligation imposed by, the Insurance Law or other law in the course of his or her dealings as an illustration actuary;
(ii) been found guilty of fraudulent or dishonest practices;
(iii) demonstrated his or her incompetence, lack of cooperation, or untrustworthiness to act as an illustration actuary; or
(iv) resigned or been removed as an illustration actuary within the past five years as a result of acts or omissions indicated in any adverse report on examination or as a result of a failure to adhere to generally acceptable actuarial standards;
(4) notify the Superintendent of any action taken by a Commissioner or Superintendent of Insurance of another state similar to that under paragraph (3) above;
(5) disclose in the annual certification whether, since the last certification, a currently payable scale applicable for business issued within the previous five years and within the scope of the certification has been reduced for reasons other than changes in the experience factors underlying the disciplined current scale. If non-guaranteed elements illustrated for new policies are not consistent with those illustrated for similar in force policies, this shall be disclosed in the annual certification. If non-guaranteed elements illustrated for both new and in force policies are not consistent with the non-guaranteed elements actually being paid, charged or credited to the same or similar forms, this shall be disclosed in the annual certification; and
(6) disclose in the annual certification the method used to allocate overhead expenses for all illustrations:
(i) fully allocated expenses;
(ii) marginal expenses; or
(iii) a generally recognized expense table based on fully allocated expenses representing a significant portion of insurance companies and approved by the Superintendent.
(d) The illustration actuary shall file a certification with the board and with the Superintendent annually for all policy forms for which illustrations are used and before a new policy form is illustrated. If an error in a previous certification is discovered, the illustration actuary shall notify the board of directors of the insurer and the Superintendent promptly.
(e) If an illustration actuary is unable to certify the scale for any policy form illustration the insurer intends to use, the actuary shall notify the board of directors of the insurer and the Superintendent promptly of his or her inability to certify.
(f) A responsible officer of the insurer, other than the illustration actuary, shall certify annually:
(1) that the illustration formats meet the requirements of this Subpart and that the scales used in insurer-authorized illustrations are those scales certified by the illustration actuary; and
(2) that the company has provided its agents with information about the expense allocation method used by the company in its illustrations and disclosed as required in Section 53-3.7(c)(6) of this Subpart.
(g) The annual certifications shall be provided to the Superintendent each year by a date determined by the insurer.
(h) If an insurer changes the illustration actuary responsible for all or a portion of the companys policy forms, the insurer shall notify the Superintendent of that fact promptly and disclose the reason for the change.
I, Neil D. Levin, Superintendent of Insurance of the State of New York, do hereby certify that the foregoing repeal of Part 53 of Title 11 of the Official Compilation of Codes, Rules, and Regulations and adoption of new Part 53 of Title 11 of the Official Compilation of Codes, Rules and Regulations of the State of New York (Regulation 74) are hereby promulgated by me on this day, pursuant to the authority granted by Sections 201, 301, 308, 1313, 2123, 2208, 2405, 3201, 3203, 3209, 3219, 3222, 4221, 4223, 4226, 4231, 4232, 4240, 4510, 4511, 4513 and 4518 of the Insurance Law and Section 263 of the Banking Law.
The Notice of Proposed Rule Making for this amendment was published in the State Register on August 5, 1998, I.D. # INS-31-98-00024.
|Dated: January 22, 1999|
Life Insurance Buyers Guide
This guide can help you when you shop for life insurance. It discusses how to:
Prepared by the National Association of Insurance Commissioners
The National Association of Insurance Commissioners is an association of state insurance regulatory officials. This association helps the various insurance departments to coordinate insurance laws for the benefit of all consumers.
This guide does not endorse any company or policy.
Reprinted by. . .
IMPORTANT THINGS TO CONSIDER
Buying Life Insurance
When you buy life insurance, you want coverage that fits your needs.
First, decide how much you needand for how longand what you can afford to pay. Keep in mind the major reason you buy life insurance is to cover the financial effects of unexpected or untimely death. Life insurance can also be one of many ways you plan for the future.
Next, learn what kinds of policies will meet your needs and pick the one that best suits you.
Then, choose the combination of policy premium and benefits that emphasizes protection in case of early death, or benefits in case of long life, or a combination of both.
It makes good sense to ask a life insurance agent or company to help you. An agent can help you review your insurance needs and give you information about the available policies. If one kind of policy doesnt seem to fit your needs, ask about others.
This guide provides only basic information. You can get more facts from a life insurance agent or company or from your public library.
What About the Policy You Have Now?
If you are thinking about dropping a life insurance policy, here are some things you should consider:
- If you decide to replace your policy, dont cancel your old policy until you have received the new one. You then have a minimum period to review your new policy and decide if it is what you wanted.
- It may be costly to replace a policy. Much of what you paid in the early years of the policy you have now, paid for the companys cost of selling and issuing the policy. You may pay this type of cost again if you buy a new policy.
- Ask your tax advisor if dropping your policy could affect your income taxes.
- If you are older or your health has changed, premiums for the new policy will often be higher. You will not be able to buy a new policy if you are not insurable.
- You may have valuable rights and benefits in the policy you now have that are not in the new one.
- If the policy you have now no longer meets your needs, you may not have to replace it. You might be able to change your policy or add to it to get the coverage or benefits you now want.
- At least in the beginning, a policy may pay no benefits for some causes of death covered in the policy you have now.
In all cases, if you are thinking of buying a new policy, check with the agent or company that issued you the one you have now. When you bought your old policy, you may have seen an illustration of the benefits of your policy. Before replacing your policy, ask your agent or company for an updated illustration. Check to see how the policy has performed and what you might expect in the future, based on the amounts the company is paying now.
How Much Do You Need?
Here are some questions to ask yourself:
- How much of the family income do I provide? If I were to die early, how would my survivors, especially my children, get by? Does anyone else depend on me financially, such as a parent, grandparent, brother or sister?
- Do I have children for whom Id like to set aside money to finish their education in the event of my death?
- How will my family pay final expenses and repay debts after my death?
- Do I have family members or organizations to whom I would like to leave money?
- Will there be estate taxes to pay after my death?
- How will inflation affect future needs?
As you figure out what you have to meet these needs, count the life insurance you have now, including any group insurance where you work or veterans insurance. Dont forget Social Security and pension plan survivors benefits. Add other assets you have: savings, investments, real estate and personal property. Which assets would your family sell or cash in to pay expenses after your death?
What Is the Right Kind of Life Insurance?
All policies are not the same. Some give coverage for your lifetime and others cover you for a specific number of years. Some build up cash values and others do not. Some policies combine different kinds of insurance, and others let you change from one kind of insurance to another. Some policies may offer other benefits while you are still living. Your choice should be based on your needs and what you can afford.
There are two basic types of life insurance: term insurance and cash value insurance. Term insurance generally has lower premiums in the early years, but does not build up cash values that you can use in the future. You may combine cash value life insurance with term insurance for the period of your greatest need for life insurance to replace income.
Term Insurance covers you for a term of one or more years. It pays a death benefit only if you die in that term. Term insurance generally offers the largest insurance protection for your premium dollar. It generally does not build up cash value.
You can renew most term insurance policies for one or more terms even if your health has changed. Each time you renew the policy for a new term, premiums may be higher. Ask what the premiums will be if you continue to renew the policy. Also ask if you will lose the right to renew the policy at some age. For a higher premium, some companies will give you the right to keep the policy in force for a guaranteed period at the same price each year. At the end of that time you may need to pass a physical examination to continue coverage, and premiums may increase.
You may be able trade many term insurance policies for a cash value policy during a conversion periodeven if you are not in good health. Premiums for the new policy will be higher than you have been paying for the term insurance.
Cash Value Life Insurance is a type of insurance where the premiums charged are higher at the beginning than they would be for the same amount of term insurance. The part of the premium that is not used for the cost of insurance is invested by the company and builds up a cash value that may be used in a variety of ways. You may borrow against a policys cash value by taking a policy loan. If you dont pay back the loan and the interest on it, the amount you owe will be subtracted from the benefits when you die, or from the cash value if you stop paying premiums and take out the remaining cash value. You can also use your cash value to keep insurance protection for a limited time or to buy a reduced amount without having to pay more premiums. You also can use the cash value to increase your income in retirement or to help pay for needs such as a childs tuition without canceling the policy. However, to build up this cash value, you must pay higher premiums in the earlier years of the policy. Cash value life insurance may be one of several types; whole life, universal life and variable life are all types of cash value insurance.
Whole Life Insurance covers you for as long as you live if your premiums are paid. You generally pay the same amount in premiums for as long as you live. When you first take out the policy, premiums can be several times higher than you would pay initially for the same amount of term insurance. But they are smaller than the premiums you would eventually pay if you were to keep renewing a term policy until your later years.
Some whole life policies let you pay premiums for a shorter period such as 20 years, or until age 65. Premiums for these policies are higher since the premium payments are made during a shorter period.
Universal Life Insurance is a kind of flexible policy that lets you vary your premium payments. You can also adjust the face amount of your coverage. Increases may require proof that you qualify for the new death benefit. The premiums you pay (less expense charges) go into a policy account that earns interest. Charges are deducted from the account. If your yearly premium payment plus the interest your account earns is less than the charges, your account value will become lower. If it keeps dropping, eventually your coverage will end. To prevent that, you may need to start making premium payments, or increase your premium payments, or lower your death benefits. Even if there is enough in your account to pay the premiums, continuing to pay premiums yourself means that you build up more cash value.
Variable Life Insurance is a kind of insurance where the death benefits and cash values depend on the investment performance of one or more separate accounts, which may be invested in mutual funds or other investments allowed under the policy. Be sure to get the prospectus from the company when buying this kind of policy and study IT caREfully. You will have higher death benefits and cash value if the underlying investments do well. Your benefits and cash value will be lower or may disappear if the investments you chose didnt do as well as you expected. You may pay an extra premium for a guaranteed death benefit.
Life Insurance Illustrations
You may be thinking of buying a policy where cash values, death benefits, dividends or premiums may vary based on events or situations the company does not guarantee (such as interest rates). If so, you may get an illustration from the agent or company that helps explain how the policy works. The illustration will show how the benefits that are not guaranteed will change as interest rates and other factors change. The illustration will show you what the company guarantees. It will also show you what could happen in the future. Remember that nobody knows what will happen in the future. You should be ready to adjust your financial plans if the cash value doesnt increase as quickly as shown in the illustration. You will be asked to sign a statement that says you understand that some of the numbers in the illustration are not guaranteed.
Finding a Good Value in Life Insurance
After you have decided which kind of life insurance is best for you, compare similar policies from different companies to find which one is likely to give you the best value for your money. A simple comparison of the premiums is not enough. There are other things to consider. For example:
- Do premiums or benefits vary from year to year?
- How much do the benefits build up in the policy?
- What part of the premiums or benefits is not guaranteed?
- What is the effect of interest on money paid and received at different times on the policy?
Once you have decided which type of policy to buy, you can use a cost comparison index to help you compare similar policies. Life insurance agents or companies can give you information about several different kinds of indexes that each work a little differently. One type helps you compare the costs between two policies if you give up the policy and take out the cash value. Another helps you compare your costs if you dont give up your policy before its coverage ends. Some help you decide what kind of questions to ask the agent about the numbers used in an illustration. Each index is useful in some ways, but they all have shortcomings. Ask your agent which will be most helpful to you. Regardless of which index you use, compare index numbers only for similar policiesthose that offer basically the same benefits, with premiums payable for the same length of time.
Remember that no one company offers the lowest cost at all ages for all kinds and amounts of insurance. You should also consider other factors:
- How quickly does the cash value grow? Some policies have low cash values in the early years that build quickly later on. Other policies have a more level cash value build-up. A year-by-year display of values and benefits can be very helpful. (The agent or company will give you a policy summary or an illustration that will show benefits and premiums for selected years.)
- Are there special policy features that particularly suit your needs?
- How are nonguaranteed values calculated? For example, interest rates are important in determining policy returns. In some companies increases reflect the average interest earnings on all of that companys policies regardless of when issued. In others, the return for policies issued in a recent year, or a group of years, reflects the interest earnings on that group of policies; in this case, amounts paid are likely to change more rapidly when interest rates change.
Addendum to Life Insurance Buyers Guide
After you have decided which kind of life insurance fits your needs, look for a good buy. Your chances of finding a good buy are better if you use two types of index numbers that have been developed to aid in shopping for life insurance. One is called the "Surrender Cost Index" and the other is the "Net Payment Cost Index". It will be worth your time to try to understand how these indexes are used, but in any event, use them only for comparing the relative costs of similar policies. LOOK FOR POLICIES WITH LOW COST INDEX NUMBERS.
What is Cost?
"Cost" is the difference between what you pay and what you get back. If you pay a premium for life insurance and get nothing back, your cost for the death protection is the premium. If you pay a premium and get something back later on, such as a cash value, your cost is smaller than the premium.
The cost of some policies can also be reduced by dividends; these are called "participating" policies. Companies may tell you what their current dividends are, but the size of future dividends is unknown today and cannot be guaranteed. Dividends actually paid are set each year by the company.
Some policies do not pay dividends. These are called "guaranteed cost" or "nonparticipating" policies. Every feature of a guaranteed cost policy is fixed so that you know in advance what your future cost will be.
The premiums and cash values of a participating policy are guaranteed, but the dividends are not. Premiums for participating policies are typically higher than for guaranteed cost policies, but the cost to you may be higher or lower, depending on the dividends actually paid. What are Cost Indexes?
In order to compare the cost of policies, you need to look at:
2. Cash Values
Cost Indexes use one or more of these factors to give you a convenient way to compare relative costs of similar policies. When you compare costs, an adjustment must be made to take into account that money is paid and received at different times. It is no enough to just add up the premiums you will pay and to subtract the cash values and dividends you expect to get back. These indexes take care of the arithmetic for you. Instead of having to add, subtract and multiple and divide many numbers yourself, you just compare the index numbers which you can get from life insurance agents and companies.
1. Life Insurance Surrender Cost Index. This index is useful if you consider the level of the cash values to be of primary importance to you. It helps you compare costs if at some future point in time, such as 10 or 20 years, you were to surrender the policy and take its cash value.
2. Life Insurance Net Payment Cost Index. This index is useful if your main concern is the benefits that are to be paid at your death and if the level of cash values is of secondary importance to you. It helps you compare costs at some future point in time, such as 10 or 20 years, if you continue paying premiums on your policy and do not take its cash value.
There is another number called the Equivalent Level Annual Dividend. It shows the part dividends play in determining the cost index of a participating policy. Adding a policys Equivalent Level annual Dividend to its cost index allows you to compare total costs of similar policies before deducting dividends. However, if you make any cost comparisons of a participating policy with a non-participating policy, remember that the total cost of the participating policy will be reduced by dividends, but the cost of the non-participating policy will not change.
How Do I Use Cost Indexes?
The most important thing to remember when using cost indexes is that a policy with a small index number is generally a better buy than a comparable policy with a larger index number. The following rules are also important:
(1) Cost comparisons should only be made between similar plans of life insurance. Similar plans are those which provide essentially the same basic benefits and require premium payments for approximately the same period of time. The closer policies are to being identical, the more reliable the cost comparison will be.
(2) Compare index numbers only for the kind of policy, for your age and for the amount you intend to buy. Since no one company offers the lowest cost for all types of insurance at all ages and for all amounts of insurance, it is important that you get the indexes for the actual policy, age and amount which you intend to buy. Just because a Shoppers Guide tells you that one companys policy is a good buy for a particular age and amount, you should not assume that all of that companys policies are equally good buys.
(3) Small differences in index numbers could be offset by other policy features, or differences in the quality of service you may expect from the company or its agent. Therefore, when you find small differences in cost indexes, your choice should be based on something other than cost.
(4) In any event, you will need other information on which to base your purchase decision. Be sure you can afford the premiums, and that you understand its cash values, dividends and death benefits. You should also make a judgment on how ell the life insurance company or agent will provide service in the future, to you as a policyholder.
(5) These life insurance cost indexes apply to new policies and should not be used to determine whether you should drop a policy you have already owned for a while, in favor of a new one. If such a replacement is suggested, you should ask for information from the company which issued the old policy before you take action.