DEPARTMENT OF BANKING AND INSURANCE
DIVISION OF INSURANCE
Standards for Individual Life Insurance Policy Forms, Individual Annuity Contract Form Standards, Standards for Contracts on a Variable Basis
Proposed Amendments: N.J.A.C. 11:4-41.3 and 41.10, 43.3 and 43.5, 44.3 and 44.4
Authorized By: Karen L. Suter, Commissioner, Department of Banking and Insurance.
Authority: N.J.S.A. 17:1-8.1, 17:1-15e, 17B:25-18, 17B:25-18.1 and 17B:25-18.2
Proposal Number: PRN - 2001-258.
Submit comments by August 1, 2001 to:
FAX: (609) 292-0896
N.J.A.C. 11:4-41, 43 and 44 contain the Department of Banking and Insurance ("Department") standards for approval of all individual life insurance policy forms, individual annuity contract forms and contracts on a variable basis respectively. The Department originally promulgated these standards in 1996 to implement the Life and Health Insurance and Health Maintenance Organization Form Approval Reform Act (P.L. 1995, c. 73, effective April 10, 1995) ("Act"). The Act was intended to improve the Department's life insurance, health insurance and annuity forms approval process.
Consistent with the purpose of the Act, as well as with the National Association of Insurance Commissioners ("NAIC") "speed-to-market" initiative, the Department is now proposing to amend certain regulatory provisions relating to individual life insurance, individual annuity and variable contract forms. Some of the proposed amendments merely codify the Department's current forms approval position and practice. Formal adoption of these standards will ensure that insurers are provided with notice of the Department's requirements before they actually submit forms for approval. Some of the proposed amendments will provide insurers with greater flexibility than is available under the Department's current rules. All of the proposed amendments will further streamline the forms approval process and enable these forms to enter the marketplace more readily. Specifically, the Department is proposing the following amendments:
N.J.A.C. 11:4-41.3(b)9ii, relating to individual life insurance forms, and 11:4-43.5(a), relating to individual annuity contract forms, are being amended by adding the term "dollar" to describe the minimum and maximum premium payments set forth in the policy and contract forms. The amendment would also permit insurers to change the limit(s) on the condition that advance written notice of the new limit(s) is provided to policy and contract owners. This amendment would provide insurers with sufficient flexibility to be responsive to new money interest rates. This amendment would also provide policy and contract owners with more flexibility in the timing and amount of their premium payments, as well as the opportunity to enhance the value of their policy or contract.
New provisions have been proposed at N.J.A.C. 11:4-41.3(a)13 and 14 relating to individual life forms, and at N.J.A.C. 11:4-43.3(f) and (g) relating to individual annuity forms, that address revisions and amendments to policies and contracts subsequent to issue. Insurers frequently reserve the right to amend or endorse forms to reflect new law, usually at the Federal level. These proposed provisions specifically state that while insurers may continue this practice, policy or contract owners must be given the opportunity to refuse the change. However, an insurer may adopt a change despite owner refusal if such refusal would cause the contract to become null and void. These proposed new provisions also contain a general requirement that policies and contracts must be amended or endorsed to reflect any changes subsequent to issue.
N.J.A.C. 11:4-41.10(f) has been added to address reinstatement requirements peculiar to survivorship forms. The proposed provision would limit insurers to requiring evidence of insurability for only insureds alive at the time of default.
N.J.A.C. 11:4-43.3(c)4 is being amended by adding language that would require any method of adjustment for misstatement of age or sex relating to an individual annuity contract to be set forth in the contract form.
A new provision at N.J.A.C. 11:4-43.5(b) is being added that specifies the criteria for using the formula for a flexible premium annuity as defined in the Standard Nonforfeiture Law for individual deferred annuities at N.J.S.A. 17B:25-20. Specifically, an annuity may only be called a flexible premium annuity and utilize the corresponding formula if the owner is permitted to pay premiums for at least five years. This proposed amendment ensures that the title of the contract reflects the average person's expectation for a flexible premium annuity, and that the contract provides the minimum required values and benefits.
N.J.A.C. 11:4-44.3(a)2 is being amended by removing the requirement that an insurer's right to defer any payments under a variable contract is limited to periods when the New York Stock Exchange is closed for trading or the Securities and Exchange Commission has determined that a state of emergency makes payment impractical. The Department has concluded that there may be other circumstances under which deferral or suspension of payments based on valuation of the separate account may be appropriate, such as a failure in the normal means to determine, or an inability to ascertain, the prices or values of the investments (for example, the non-liquid nature of a real estate separate account).
N.J.A.C. 11:4-44.3(a)3 is being amended to allow insurers to describe with less specificity in the individual life insurance variable contract form the conditions under which transfers, loans and other transactions may be made. Because of the changing market, restrictions imposed by underlying fund managers and the possible obsolescence of contract language in view of future fund availability, the Department is proposing to allow insurers to rely on the prospectus and other methods of notification to communicate any such restrictions.
A new provision is being added at N.J.A.C. 11:4-44.3(c) that requires insurers to provide a free review period for all individual life insurance contracts on a variable basis. This review period will allow new policyholders to cancel the policy if they so choose without any charge or penalty. The proposed provision also addresses the determination of the minimum refund amount upon cancellation of such a contract following a free look period. Unlike traditional individual life insurance policies where premium is allocated to the insurer's general account, premium for variable contracts is allocated to a separate account. Since full refund of premium would be inappropriate, the proposed provision permits insurers to take into consideration the performance of the underlying separate account.
N.J.A.C. 11:4-44.4(a)3, which prohibits insurer reliance on the prospectus for individual life insurance and annuities contracts on a variable basis, is being deleted to be consistent with the proposed amendment at N.J.A.C. 11:4-44.3(a)3, which permits insurer reliance on the prospectus and other forms of notification to communicate restrictions on amounts and timing of certain transactions. Rather than requiring the policy or contract to specify all conditions and restrictions related to current funds and the management thereof, both of these amendments will allow insurers to communicate this information in the prospectus.
These proposed amendments will have a favorable impact on both policy and contract owners and insurers. Some of the amendments will enhance consumer protection by requiring insurers to specifically set forth in their policy and contract forms certain practices or requirements. For example, insurers will be required to provide policy and contract owners with advance notice of changes in minimum and maximum premium payments; insurers will be required to provide policy and contract owners with advance notice that they may refuse certain policy or contract changes proposed by the insurer; and insurers will be required to provide a free review period and set forth how the amount of any refund of premium following such a period will be determined.
Other proposed amendments will provide insurers with more flexibility than has been available under current Department rules. For example, insurers may change their individual life forms to reflect changes in the law, but must provide policy and contract owners with the opportunity to refuse such changes. Insurer deferral rights relating to variable contracts are being expanded by removing restrictions that currently limit such rights to periods during which the New York Stock Exchange is closed for trading or when the Securities and Exchange Commission has determined that a state of emergency exists. Also, insurers will be permitted to rely on their prospectuses and other notice methods to communicate any restrictions related to policy or contract transactions.
These proposed amendments may have a favorable economic impact on both insurers and policy and contract owners. The flexibility regarding policy and contract forms granted insurers by these amendments will result in insurer forms reaching the marketplace more readily and will enhance their competive value. Some of the proposed changes may also benefit policy and contractowners, such as allowing insurers to change the minimum and maximum dollar limits on premium payments. By choosing to contribute more in premium, the value of a policy or contract will be enhanced. Also, the option to make a lower premium payment may be more convenient, and would allow that smaller sum to more readily earn investment dollars.
Federal Standards Statement
A Federal standards analysis is not required because these proposed amendments are not subject to any Federal standards or requirements.
The Department does not anticipate that these proposed amendments will result in the generation or loss of jobs.
Agriculture Industry Impact
The proposed amendments have no impact on the agriculture industry.
Regulatory Flexibility Statement
A regulatory flexibility analysis is not required because the insurers to whom these proposed amendments apply do not employ fewer than 100 full-time employees, and therefore are not "small businesses" as that term is defined by the Regulatory Flexibility Act, N.J.S.A. 52:14B-16 et seq.
Full text of the proposal follows (additions indicated in boldface thus; deletions
indicated in brackets [thus]):
SUBCHAPTER 41. STANDARDS FOR INDIVIDUAL LIFE INSURANCE POLICY FORMS
11:4-41.3 General standards
(a) (No change.)
(b) The following approval standards shall apply to all individual life insurance forms:
1. - 8. (No change.)
9. All forms shall include a provision which sets forth the premiums payable at all durations in order to maintain the policy in force.
i. (No change.)
ii. Forms shall include any upper and/or lower dollar limits on premium payments, which the insurer may waive in a uniform and non-discriminatory manner upon written notice of any new limits to the owner. The form shall describe the initial limits and the required written notice of any new limits.
iii. The maximum premium payment for a flexible premium life insurance policy shall not be lower than the amount which will continue to qualify the policy as life insurance or the amount necessary to keep the policy in force, if greater.
Recodify existing iii. - vi. as iv. - vii. (No change in text.)
[vii.] viii. Account value policies kept in force by a policy value exceeding zero shall be permitted to contain a minimum guarantee provision. Account value policies which use the account value less surrender charge to determine lapse shall also be permitted to contain a minimum premium test provision. The following requirements shall apply to minimum guarantee provisions and minimum premium test provision:
(1) (No change.)
(2) Any policy to which [(b)9vv(1)] (b)9viii(1) above applies shall indicate, on the same page as a minimum guarantee premium or minimum text premium, the maximum amount (based on policy guarantees) required to be paid at the end of the guarantee period to keep the policy in force assuming continuation of the initial death benefit, payment of minimum guarantee premiums, and no policy loans or partial withdrawals. This requirement applies only to those policies to which requirement [(b)9vii(1)] (b)9viii(1) above applies.
10. - 12. (No change.)
13. The form may contain language that permits the insurer unilaterally to amend or modify the form to satisfy any applicable law. However, the owner shall be permitted to refuse any such change unless noncompliance would cause the contract to be null and void.
14. The form shall be amended or endorsed to reflect any changes or modifications made to the form subsequent to issue.
11:4-41.10 Standards for survivorship forms
(a) – (e) (No change.)
(f) The form shall provide for reinstatement pursuant to N.J.A.C. 11:4-41.3(b)8. The insurer shall only require evidence of insurability on any insured alive on the date of default.
SUBCHAPTER 43. INDIVIDUAL ANNUITY CONTRACT FORM STANDARDS
11:4-43.3 General requirements and prohibitions
(a) – (b) (No change.)
(c) All individual annuities shall satisfy the following conditions:
1. - 3. (No change.)
4. The form shall contain a provision describing any method for adjusting benefits and values on the basis of misstatement of age or sex. Interest may be applied in determining overpayments and underpayments at a rate specified in the form. The same specified rate shall apply to overpayments and underpayments.
(d) - (e) (No change.)
(f) The form may contain language that permits the insurer unilaterally to amend or modify the form to satisfy any applicable law. However, the owner shall be permitted to refuse any such change unless noncompliance would cause the contract to be null and void.
(g) The form shall be amended or endorsed to reflect any changes or modifications made to the form subsequent to issue.
11:4-43.5 Individual deferred annuities
(a) Insurers shall include a provision in all individual flexible premium annuity forms specifying any upper and/or lower dollar limits on premium payments, which the insurer may waive in a uniform and nondiscriminatory manner upon written notice of any new limits to the owner. Forms shall describe the initial limits and the required written notice of any new limits. [and] Insurers shall not arbitrarily refuse premium payments.
(b) An annuity form shall only be identified as a flexible premium annuity and use the corresponding formula for the derivation of the minimum nonforfeiture amount for a contract providing flexible considerations set forth at N.J.S.A. 17B:25-20g(1) if the owner
is permitted to pay premiums for a period of no less than five years. Any annuity contract providing flexible premiums for less than five years shall use the formula for derivation of the minimum nonforfeiture amount for a contract providing a single consideration set forth at N.J.S.A. 17B:25-20g(3).
Recodify existing (b) - (d) as (c) - (e) (No change in text.)
[(e)] (f) The requirements at [(d)] (e) above shall be waived if the insurer includes in its submission a separate actuarial memorandum which demonstrates that the values provided under the form on the guaranteed basis equal or exceed minimum values as described at N.J.S.A. 17B:25-20g for both a single premium or flexible premium contract.
[(f)] (g) (No change in text.)
SUBCHAPTER 44. STANDARDS FOR CONTRACTS ON A VARIABLE BASIS
11:4-44.3 Standards for variable contracts
(a) All individual life insurance and annuities contracts on a variable basis shall include the following:
1. (No change.)
2. A provision specifying any rights for deferral. [Payment of a death benefit in excess of any minimum guaranteed death benefits, of cash values, of partial withdrawals or of partial surrenders dependent upon the valuation of the separate account may be deferred for any period during which the New York Stock Exchange is closed for trading (except for normal holiday closings) or when the Securities and Exchange Commission has determined that a state of emergency exists which may make such payment impractical.] Any deferral of a minimum guaranteed death benefit for an individual variable life insurance contract shall comply with N.J.S.A. 17B:25-11; and
3. A provision describing any conditions for partial withdrawals, partial surrenders, loans, transfers and new deposits [, including, but not limited to, restrictions on the amounts and timing of such transactions and the charging of any fees for such transactions]. Any required minimum amount for a partial withdrawal, partial surrender, loan or transfer shall not exceed $1,000. [The insurer shall not reserve the right to unilaterally change the contract provisions on minimum amount, timing or fees. However, the contract may set forth the most stringent limits and allow for the utilization of more favorable terms.]
(b) (No change.)
(c) All individual life insurance contracts on a variable basis shall include a period of free review as described at N.J.A.C. 11:4-41.3(b)1. The amount to be returned to the policyholder following cancellation of the contract pursuant to this subsection shall be no less than premiums (including fees and charges) applied to the separate account, adjusted for investment gains and losses, plus premiums (including fees and charges) applied to any general account option.
[(c)] (d) (No change in text.)
11:4-44.4 Prohibited provisions
(a) The following restrictions shall apply to all individual life insurance and annuities contracts on a variable basis:
1. - 2. (No change.)
[3. The contract shall not refer to or rely upon the prospectus, but shall constitute the entire contract.]
[4.] 3 (No change in text.)