BULLETIN NO. 02-10

To: ALL NEW JERSEY LICENSED LIFE INSURANCE COMPANIES AND FRATERNAL BENEFIT SOCIETIES

From:

HOLLY C. BAKKE, COMMISSIONER
RE: STANDARD NONFORFEITURE LAW FOR INDIVIDUAL DEFERRED ANNUITIES

The standard nonforfeiture law for individual deferred annuities at N.J.S.A. 17B:25-20g provides formulas for determining minimum nonforfeiture amounts for these annuities. The formulas define the amount at a particular time as "an accumulation up to that time . . . at a rate of 3% per annum of percentages of net considerations (as hereinafter defined) paid prior to such time; decreased by the sum of any prior withdrawals from or partial surrenders of the contract accumulated at a rate of interest of 3% per annum and the amount of any indebtedness to the insurer on the contract, including interest due and accrued; and increased by any existing additional amounts credited by the insurer to the contract."

The New Jersey Department of Banking and Insurance (Department) historically has interpreted this provision as requiring the crediting of at least 3% interest to the annuity contract on an annual basis. In addition, the Department historically has interpreted "increased by any existing additional amounts credited by the insurer to the contract" to apply to amounts credited to an annuity contract in excess of the 3% minimum. Consequently, such additional amounts became part of the minimum non-forfeiture value when credited.

The Department's interpretations of the standard nonforfeiture law have resulted in the disapproval of general account products containing provisions that effectively remove such excess interest from the nonforfeiture value, even though the nonforfeiture value exceeds net considerations accumulated at 3%. Products with these features include market value adjusted annuities and some forms of equity-indexed annuities, specifically the product designs designated as "point-to-point." The significant feature of these products is that interest credited to the contract may not be available upon surrender due to changes in prices of fixed income or equity securities. Also, the Department has disapproved general account products that credit a higher rate of interest to an "annuity" account than to a "cash value" account. These "two tier" annuity products credit interest in excess of 3% that, typically, is never added to the nonforfeiture amount.

The Department understands that other jurisdictions interpret the standard nonforfeiture law differently in their review of market value adjusted annuities, equity indexed annuities, and two tier annuities. Accordingly, those jurisdictions do not find such annuities to violate the standard nonforfeiture law for annuities when the contract provides a minimum nonforfeiture value equal to the net considerations accumulated at 3%. Additional increases in the value of the annuity, whether from additional interest or appreciation in the price of securities, are not considered to increase the minimum nonforfeiture value, and hence are not considered to be additional amounts credited by the insurer to the contract.

The purpose of this Bulletin is to notify life insurers and fraternal benefit societies that the Department is hereby modifying its requirements for nonforfeiture values for individual deferred annuities subject to N.J.S.A. 17B:25-20 as follows:

· All equity indexed annuity contracts and all two tier annuity contracts that provide a minimum nonforfeiture value equal to the net considerations accumulated at 3% may be submitted for filing with the Department, and will not be found to violate the requirements of N.J.S.A. 17B:25-20 solely as a result of these design features.

The Department intends to repeal the requirement at N.J.A.C. 11:4-44.5 requiring that market value adjusted annuity contracts be issued as variable contracts using a separate account. Such annuity contracts that provide a minimum nonforfeiture value equal to the net considerations accumulated at 3% may be submitted for filing with the Department in contemplation of the repeal of N.J.A.C. 11:4-44.5, and will not be found to violate the requirements of N.J.S.A. 17B:25-20 solely as a result of these design features.
Questions or written inquiries regarding this Bulletin should be directed to:

Lynda Klebold
Chief, Life Insurance Bureau
New Jersey Department of Banking and Insurance
P.O. Box 470
Trenton, NJ 08625-0470
Phone: 609-292-5427 x 50320
Fax: 609-633-0527

5/9/02 _____/S/ Holly C. Bakke_________