The Office of General Counsel issued the following informal opinion on July 11, 2001, representing the position of the New York State Insurance Department.

Re: Regulation 60 and Replacements of Annuity Contracts.

Question Presented:

Are there any rules or regulations under the New York Insurance Law that govern replacements of annuity contracts?




The inquirer is a financial consultant with an investment banking and securities firm. The inquirer recently recommended a variable annuity exchange pursuant to Internal Revenue Code §1035 (2001) for one of the inquirer's elderly clients to diversify the client's holding and to lock in a new death benefit. Both the current and the new insurer were using the same opening balance, the same rates of return, and both insurers purported to have the same mortality and expense charges ("M & E"). However, in completing the contract comparisons the inquirer discovered that the current insurer showed 6% and 12% rates of return net of M & E (i.e. 13.15% less 1.15%= 12%) and the new insurer showed the 6% and 12% levels less the M & E (12%- 1.15%+10.85%). The comparison appeared to favor the current insurer, when in reality all the numbers should have been the same. The inquirer was concerned about the insurance agent's liability if the agent was unable to properly document the discrepancy. The inquirer asked whether there are any specific rules or regulations under the New York Insurance Law that govern replacements of annuity contracts.


N.Y. Ins. Law § 2123 (a)(1) (McKinney 2001) provides in pertinent part:

(a) (1) no agent or representative of any insurer . . . in this state and no insurance broker, and no other person, firm, association or corporation, shall issue or circulate or cause or permit to be issued or circulated, any illustration, circular, statement or memorandum misrepresenting the terms, benefits or advantages of any policy or contract of life, accident or health insurance, any annuity contract. . . delivered or issued for delivery or to be delivered or issued for delivery, in this state, or shall make any misleading estimate as to the dividends or share of surplus or additional amounts to be received in the future on such policy or contract, or shall make any false or misleading statement as to the dividends or share of surplus or additional amounts previously paid by any such insurer or health maintenance organization on similar policies or contracts . . .

N.Y. Comp. Codes R. and Regs. tit. 11, § 51.5 (c)(3)(2001)(Regulation 60) provides that where a replacement is involved the agent must, inter alia, provide the insured with the "IMPORTANT Notice Regarding Replacement or Change of Life Insurance Policies or Annuity Contracts" and a completed "Disclosure Statement" signed by the agent.

The purpose of Regulation 60 is to prevent unfair methods of competition and practices in the replacement of life insurance policies and annuity contracts by providing applicants with enough information to make an informed decision regarding replacements. See N.Y. Comp. Codes R. and Regs. tit. 11, § 51.1 (b) 2001). Thus, a disclosure statement should provide the insured with accurate comparative information about significant features of the replaced and replacing policies or annuity contracts.

Regulation 60 is applicable to replacements of both life insurance policies and annuity contracts, including both fixed and variable annuities. Thus, variable annuity exchanges performed pursuant to Internal Revenue Code §1035 (2001) are replacements that are subject to the disclosure requirements of Regulation 60.

It is the position of the Department that, under circumstances surrounding the sale of products, where fees and charges may be a significant factor in a determination by a client to purchase or replace a product, an illustration of applicable fees and charges is an essential element in the disclosure.

Although the disclosure forms contained in N.Y. Comp. Codes R. & Regs., tit. 11, Appendices10A and 10B (2001) do not specifically provide space for information regarding charges and fees, they do provide a space for remarks, which may be used by the agent to clarify any discrepancies in the illustration.

For further information, you may contact Attorney Pascale Joasil at the New York City office.