OGC Opinion No. 07-08-11

The Office of General Counsel issued the following opinion on August 29, 2007 representing the position of the New York State Insurance Department.

RE: Individual Life Insurance, Sales Illustrations and Insurer Restrictions on Agents

Questions Presented:

1. Do the illustrations currently used by life insurers adequately inform prospective insureds of the cost of individual insurance policies?

2. May a life insurer restrict the activities of its agents without amending the contract by which it appointed the agent as its representative?


1. Yes, in the Insurance Department’s estimation, the illustrations as required by N. Y. Ins. Law § 3209 (McKinney 2006) and detailed in N.Y. Comp. Codes R. & Regs. tit. 11, Sub-Parts 53-2 & 53-3 (Regulation 74) adequately inform prospective insureds of the comparative cost of various individual life insurance policies.

2. As a general rule, the Insurance Department generally does not opine about restrictions that an insurer may impose on its agents' activities pursuant to contract., provided that such limitations otherwise are lawful. Based upon the information that you have furnished to this Department, the specific restrictions imposed by the life insurer in question do not arrear to violate the Insurance Law or the regulations promulgated thereunder.


According to the Department’s records, the inquirer is licensed as an insurance agent in accordance with Insurance Law § 2103(a). He indicates that for some time, he has been an agent for Insurer, that is authorized to transact a life insurance business in New York.

In his letters he contends that:

[C]urrent disclosure practices are inadequate because they do not provide information about a policy’s current cost, and without such information, the marketplace cannot properly work. . . . Also, as you may be aware, the American Academy of Actuaries recommended that the industry discontinue the use of interest adjusted indexes nearly 15 years ago because of its inherent flaws as currently used. And, finally, while the NAIC [i.e., National Association of Insurance Commissioners] regulations pertaining to sales illustrations have addressed some prior problems they have neglected the fundamental problem of inadequate cost disclosure.

In addition, he reports that, while the contract with Insurer signed in 1988 is silent on the subject of media contacts, the insurer refuses to allow its agents to communicate with reporters. In support of that contention, he forwarded a copy of Insurer’s Media Policy and Procedures, which provides, in part:

1. Any correspondence you have with the media, as a representative of the Insurer requires prior approval by Field Public Relations.

2. Only financial representatives who have received Field Public Relations discretion and consent will be approved to work with reporters. Compliance will be alerted of circumstances where a financial representative neglects to receive direction and/or approval. (Emphasis in original.)

In addition, he questions two Information Releases transmitted by Insurer to its agents. The first, issued in [Date] deals with viatical settlements:

Since [Date], Insurer’s financial representatives have been prohibited from participating in fee-based referrals or sales of insurance policies to viatical and life settlement companies. . . . There are several aspects of viatical and life settlement transactions that cause us concern:

We strongly believe there is an inherent conflict of interest for an insurance agent, who earns his or her living demonstrating to the public the need to purchase life insurance, to later be compensated for soliciting the public to sell their life insurance policies.

There is a negative perception associated with some of these transactions. The viatical or life settlement company is ‘banking’ on the early death of the insured. . . . This could be viewed as exploitation of vulnerable seniors and may place life insurance in a negative light.

There is also the potential for litigation exposure with viatical and life settlement transactions since a policyowner or beneficiary may feel the policyowner was misled into selling a policy with a resulting loss of the death benefit.

The second Information Release, issued in [Date] addresses unregistered equity indexed annuities:

In May 2005, NASD [National Association of Securities Dealers] strongly cautioned firms about the regulatory risks they face if their representatives sell unregistered Equity Indexed Annuities (“EIA”). On August 8, 2005, the NASD issued Notice to Members . . . ‘Member Responsibilities for Supervising Sales of Unregistered Equity Indexed Annuities.’ The Notice imposes strict requirements on member firms, including Insurer and their associated persons regarding the sale of unregistered EIAs. . . .

. . .

Whether a particular EIA may be considered a security is determined on the facts and circumstances of each sale, including how the EIA was marketed and sold by the individual agent. To protect our field force, their employees, and Insurer from such potential violations of securities laws and regulations, Insurer is applying this policy to all members of its Field Force and their employees.


Question 1: Illustrations

Insurance Law § 3209, which governs solicitations for life insurance, is relevant to the first question. That statute provides:

(a) Except as hereafter exempted, this section shall apply to any solicitation, negotiation or procurement of life insurance, annuities or funding agreements occurring within this state. This section shall apply to any issuer of life insurance or annuity contracts or funding agreements, including fraternal benefit societies and the life insurance department of a savings and insurance bank. . . .

(b) No policy of life insurance shall be delivered or issued for delivery in this state after the applicable effective date [January 1, 1998 for individual life insurance] . . . unless the prospective purchaser has been provided with the following: (1) a copy of the most recent buyer's guide and the preliminary information required by subsection (d) of this section, at or prior to the time an application is taken. . . (2) a policy summary upon delivery of the policy.

Insurance Law § 3209(d), in turn, sets forth the information to be contained in the “preliminary information.” In particular, Insurance Law § 3209(d)(6) requires a “Net Payment Cost Index” as part of the preliminary information. Further, Insurance Law § 3209(e) sets forth the information to be contained in the “policy summary.” Insurance Law § 3209(e)(7(A) requires such a “Net Payment Cost Index” as part of the policy summary.

In addition, Insurance Law § 3209(i) requires a buyers guide, that, to the extent practicable, must be consistent with that established by the NAIC. And Insurance Law § 3209(k) requires the Superintendent of Insurance to promulgate a regulation concerning illustrations, which should be, to the extent practicable, consistent with the illustrations developed by the NAIC.

In accordance with that statutory directive, the Superintendent promulgated 11 NYCRR Part 53 (Regulation 74). The rules for the calculation of the life insurance cost index and net payment cost index are set forth in 11 NYCRR §§ 53-2.4(a) & 53-2.5 respectively:

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 paragraph (1) of this subdivision.

(3) Divide the result of paragraph (2) of this subdivision (paragraph (1) of this subdivision 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 paragraph (2) of this subdivision (paragraph (1) of this subdivision for guaranteed cost policies) over the respective periods stipulated in paragraph (1) of this subdivision. 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 paragraph (1) of this subdivision and dividing the result by the respective factors stated in paragraph (3) of this subdivision (this amount is the annual premium payable for a level premium plan).

(5) Subtract the result of paragraph (3) of this subdivision from paragraph (4) of this subdivision.

(6) Divide the result of paragraph (5) of this subdivision by the number of thousands of the equivalent level death benefit to arrive at the life insurance surrender cost index.

11 NYCRR § 53-2.4(a)

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.

11 NYCRR § 53-2.5

A Buyers Guide is prescribed in 11 NYCRR § 53-2.6 that must include, where required by Insurance Law § 3209, the appropriate cost index. The exact Buyers Guide language set in 11 NYCRR § 53-2.7 must be used. An explanation of the various indices to be included in the Buyers Guide as set forth in 11 NYCRR § 53-2.8 also must be detailed:

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. . . . (Emphasis in original.)

11 NYCRR § 53-2.8

11 NYCRR § 53-3.5 prescribes how policy illustrations should be delivered. That requirement provides:

Such basic illustration or revised illustration shall satisfy the requirements for preliminary information required under Section 3209(d) of the Insurance Law. . . . and the requirements for the policy summary required under Section3209(e) of the Insurance Law . . . if delivered to the applicant or policyowner in conformance with this Subpart.

11 N.Y.C.R.R. § 53-3.5(d)

The net payment cost index is meant to work as a measure of the cost per thousand of insurance, taking the time value of money, together with an assumed long term interest/inflation rate of 5%, into consideration. For a policy with level annual premiums, the net payment cost index is relatively simple. Premiums paid in earlier years have a greater weight than premiums paid in later years. Calculations for policies with non-level benefits and/or premiums are more complicated, but the principle of time value of money remains the same.

Accordingly, if there were two life insurance policies with the same face amount and level premiums throughout the insured’s lifetime, and one policy was a whole life policy (with premiums payable for the life of the insured) and the second policy was one that would be paid-up after 20 years, then the policy that would be paid-up after 20 years, would, due to the fact that all costs for the policy are paid in the first 20 years, have higher annual premiums, and therefore, the cost index for the second policy also would be higher.

The inquirer correctly indicates that cost indices should not be used to compare dissimilar policies or policies from different insurers. The mandated Buyers Guide points that out in 11 NYCRR § 53-2.8:

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. . . .

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 Shopper's Guide tells you that one company's policy is a good buy for a particular age and amount, you should not assume that all of that company's policies are equally good buys.

11 N.Y.C.R.R. § 53-3.5(d), which is quoted above, allows the life insurer to provide an illustration in lieu of the preliminary information and a policy summary, but it does not specifically require that the illustration include all the information mandated for inclusion in the preliminary information and policy summary. While most life insurers include this information in the illustration, some do not.

The inquirer subsequently furnished an undated document entitled: “Preliminary Report [of the] American Academy of Actuaries [“Academy”] Task Force on Life Illustrations,” which indicated that the Academy had reviewed the recommendations contained in a research paper of the Society of Actuaries1. Since the Preliminary Report dealt with several aspects of life illustrations, the relevant portions appear to be those dealing with “Cost Comparisons”:

Require the illustration to include a footnote similar to the following:

(1) “Sales illustrations should not be used for comparative policy performance purposes. Life insurance policies are complex financial instruments, which generally contain both guaranteed and non-guaranteed elements. A sales illustration may be helpful in understanding how a particular policy performs under specified circumstances. It is generally not feasible, however, to use sales illustrations to determine whether one policy is a better buy than another”.

(2) Delete the interested-adjusted cost index from point-of-sale illustrations, recognizing that these indexes are generally used to compare policy costs.

The preliminary objections and suggestions of the Academy are covered in the quoted portions of 11 NYCRR § 53-2.8. But in any event, the Department will consider the comments in any possible future amendment to Regulation 74.

Question 2: Insurer Directives


Life insurance agents generally are regarded as independent contractors. See Kent v. State Tax Commission, 55 A.D.2d 727, 389 N.Y.S.2d 184 (3d Dept. 1976). With certain exceptions- such as the matter of. agent compensation, which is governed by Insurance Law § 4228- the Insurance Department does not regulate relations between life insurance companies and its agents. As discussed below, the restrictions to which you point do not violate the Insurance Law or the regulations promulgated thereunder.

Media Contact

The inquirer asserts that Insurer’s restriction on agent’s contact with the media is neither appropriate nor reasonable, and that the insurer has unreasonably restricted your conversations with reporters.

Insurance § 4226 prohibits misrepresentations, misleading statements, and incomplete comparisons by insurers. Subsection (a) thereof provides:

No insurer authorized to do in this state the business of life, . . . shall: (1) issue or circulate, or cause or permit to be issued or circulated on its behalf, any illustration, circular, statement or memorandum misrepresenting the terms, benefits or advantages of any of its policies or contracts . . . .

In order to effectuate Insurance Law § 4226(a)(1), as well as other statutes, the Department his promulgated N. Y. Comp. Rules & Regs. tit. 11 Part 219 (Regulation 34-A).

Accordingly, a life insurer desiring to assure that it is in compliance with Insurance Law § 4226 and Regulation 34-A, or for other valid business reasons, could require pre-clearance of any agency contacts with the media. Since this restriction is imposed by a private entity, not the government, there is no violation of the “free speech” provisions of either the First Amendment to the United States Constitution or Article I, § 8 of the New York State Constitution.

Viatical Settlements

For the last several years, Insurer’s agents have been prohibited from involvement in fee-based sales of life insurance policies. Nevertheless, many pf its agents apparently are, nonetheless, engaged in such activities. The inquirer asserts that, whatever the merits of such transactions, a blanket prohibition is unreasonable.

Agreements known as “viatical settlements” are regulated by Insurance Law Article 78. Insurance Law § 7801(b) and (c) define a “viator” and “viatical settlement” as follows:

(b) "Viator" means the owner of a life insurance policy insuring the life of a person who has a catastrophic or life threatening illness or condition, who enters into an agreement under which the viatical settlement company will pay compensation or anything of value, which compensation or value is less than the expected death benefit of the insurance policy, in return for the viator's assignment, transfer, sale, devise or bequest of the death benefit or ownership of the insurance policy to the viatical settlement company. Viator may also include a person insured under a group life insurance policy who is not prohibited from assigning his or her rights or benefits and who assigns those rights or benefits by a viatical settlement

(c) "Viatical settlement" means an agreement entered into between a viatical settlement company and a viator. The agreement shall establish the terms under which the viatical settlement company will pay compensation or anything of value, which compensation or value is less than the expected death benefit of the insurance policy, in return for the viator's assignment, transfer, sale, devise or bequest of the death benefit or ownership of the insurance policy to the viatical settlement company.

In addition to viatical settlements, there is an active market for the purchase of life insurance policies insuring individuals who are not viators within the meaning of Insurance Law § 7801(b). These “life settlement” agreements are presently not regulated under the Insurance Law, although the Department is seeking legislation to regulate all such transactions.

Insurance Law § 7802(a) requires that viatical settlement brokers be licensed in New York. The term “viatical settlement broker” is defined in Insurance Law § 7801(d):

“Viatical settlement broker" means an individual, partnership, corporation or other entity who or which for another and for a fee, commission, or other valuable consideration, offers or advertises the availability of viatical settlements, introduces viators to viatical settlement companies, or offers or attempts to negotiate viatical settlements between a viator and one or more viatical settlement companies. . . . .

Insurance Law § 7809 identifies a prohibited insurance practice. That statute states:

No policy of group life insurance issued or delivered in this state which permits assignment of a covered person's rights shall restrict the covered person from making assignments other than by gift.

Provided that a life insurer is in compliance with Insurance Law § 7809 with respect to the group life insurance policies it issues, it may, as a business practice, restrict its licensed agents from assisting in the sale of life insurance policies in either the viatical or life settlement market. The life insurance company may also preclude its agents from becoming licensed as viatical settlement brokers.

Equity Indexed Annuities

The inquirer suggests that some agents who do not have the required securities credentials are selling Equity Indexed Annuities (“EIA”.) While he does not question the insurer’s right to restrict agents from selling products for which they are not appropriately licensed, he asserts that the general prohibition is overbroad.

A security is defined in the Securities Act of 1933, 15 U.S.C.A. § 77b(a)(1) (West 2003) as follows:

The term "security" means any note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a "security," or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.

In Securities and Exchange Commission v. Variable Annuity Life Insurance Company, 359 U.S. 65 (1959), the United States Supreme Court held that the SEC had jurisdiction over insurance products that met the above definition of “security.” Such insurance products therefore are subject to dual regulation by the SEC and by an appropriate state insurance regulator.

As Insurer indicated in its Information Release, the National Association of Securities Dealers has determined that whether an EIA is a security depends on a number of factors. Insurer has decided to prohibit all agents, including those authorized to sell variable products through a Series 7 license from the NASD, from dealing in EIAs. The Insurance Department does not believe such a decision is unreasonable or improper.

For further information you may contact Principal Attorney Alan Rachlin at the New York City Office.

1 There is no indication that the Report was adopted by either the Academy as a whole or the NAIC. However, it appears that the document was considered by the Disclosure Working Group of the NAIC’s Life Insurance Committee.