DEPARTMENT OF BANKING AND INSURANCE
DIVISION OF INSURANCE
Standards for Individual Life Insurance Policy Forms
Proposed Amendment: N.J.A.C. 11:4-41.3
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 et seq. and 17B:25-18g.
Proposal Number: PRN 2001-259
Submit comments by August 1, 2001 to:
FAX: (609) 292-0896
N.J.A.C. 11:4-41 contains the Department's standards relating to individual life insurance policy forms. N.J.A.C. 11:4-41.3(b)9 states that all policy forms must include a provision that sets forth the premiums payable at all durations in order to maintain the policy in force. Historically, policies are kept in force by the payment of a stated premium on a stated schedule. Such policies are sometimes referred to as "traditional" policies. N.J.A.C. 11:4-41.2 defines non-traditional, or "account value policies," as policies that remain in force so long as an account value associated with the policy exceeds a certain amount. Such policies do not require the payment of a particular premium on a stated schedule.
N.J.A.C. 11:4-41.3(b)9vii permits account value policies to contain a minimum guarantee provision (also referred to as a no-lapse guarantee), which provides the insured with an additional measure of protection against lapse of the policy. The no-lapse guarantee enables a policy to continue in force, even if the account value falls below a stated amount, if the total premiums paid exceed an amount established by the minimum guarantee provision. The term of this no-lapse guarantee is for a specific amount of time (for example, 30 years) or for the life of the policy.
New Jersey's Standard Nonforfeiture Law ("SNFL") at N.J.S.A. 17B:25-19 specifies minimum non-forfeiture values for term insurance policies that have durations exceeding 20 years or that expire after the policyholder reaches age 71. The Department's rules at N.J.A.C. 11:4-41.9(b)9vii(1) through (7) contain standards applicable to minimum guarantee provisions. N.J.A.C. 11:4-41.3(b)9vii(6) requires a policy with a minimum guarantee provision to provide a non-forfeiture value that is no less than the traditional non-forfeiture value that would be required for a term insurance policy having the same duration as the minimum guarantee provision. The Department based this requirement on its belief that a policyholder who purchases a policy with a minimum guarantee provision and pays a periodic level premium sufficient to keep the guarantee in force effectively purchases term insurance. Accordingly, the policy with the minimum guarantee provision should provide the same minimum non-forfeiture value as the term policy. However, the Department's position as reflected in its current rules at N.J.A.C. 11:4-41.3(b)9vii(6) is a position that is held by a small minority of jurisdictions, and the Department is hereby proposing to delete this provision.
The SNFL requiring minimum non-forfeiture values for certain term insurance policies cannot clearly be interpreted to apply to the minimum guarantee provision of an account value policy. N.J.S.A. 17B:25-19a(1) applies to policies that lapse due to default in a required premium payment. However, there are no required premium payments in order to maintain the no-lapse guarantee. Rather, maintenance of the no-lapse guarantee depends on whether, at the time of potential lapse, the total premiums paid exceeds a stated amount. Accordingly, while the no-lapse guarantee is analogous to a term policy, it is not explicitly subject to the SNFL.
This analogy between the no-lapse guarantee and term insurance would further seem to suggest that the no-lapse guarantee should also provide a cash value similar to that of term insurance. However, the majority of other states do not accept this position as evidenced by the products made available for sale in those jurisdictions. Moreover, neither the National Association of Insurance Commissioners ("NAIC") nor the American Council of Life Insurers ("ACLI") has endorsed this position. The Department has re-examined its interpretation of the SNFL and has determined that the provisions of N.J.A.C. 11:4-41.3(b)vii(6) should be deleted.
Based on the above, the Department is proposing to delete N.J.A.C. 11:4-41.3(b)9vii(6).
The Department's deletion of N.J.A.C. 11:4-41.3(b)9vii(6) will have a potential favorable social impact on life insurers and insurance producers. Life insurers and producers may be favorably impacted by this repeal in that the reduction in the cost of benefits could result in greater sales, greater profit margins or greater producer compensation, depending on how the reduction is reflected in pricing.
This proposed amendment has a potential favorable economic impact on purchasers of life insurance. Elimination of the requirement for a minimum non-forfeiture value equal to the term insurance non-forfeiture value reduces the potential cost of insurance to the purchaser. Because the Department does not regulate life insurance rates, there is no assurance that this reduction in benefits will in fact be reflected in a reduction in cost. However, the Department believes that the market for life insurance is sufficiently competitive that this cost reduction will likely occur.
Purchasers of life insurance may also be negatively impacted by this proposed repeal. Elimination of the requirement that policies with no-lapse guarantees provide a certain non-forfeiture value may reduce the benefits if a lapse in the policy does in fact occur.
Life insurers will be favorably impacted by this proposed amendment in that their administrative costs will be reduced if they are permitted to use the same product design in New Jersey as in other jurisdictions.
Federal Standards Statement
A Federal standards analysis is not required because this proposed amendment is not subject to any Federal standards or requirements.
The Department does not anticipate that this proposed amendment will result in the generation or loss of jobs.
Agriculture Industry Impact
The proposed amendment has no impact on the agriculture industry.
Regulatory Flexibility Statement
A regulatory flexibility analysis is not required because the insurers to whom this proposed amendment applies 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 (addition indicated in boldface thus; deletions indicated in brackets [thus]):
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. – vi. (No change.)
vii. 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 text provision. The following requirements shall apply to minimum guarantee provisions and minimum premium text provisions.
(1) – (5) (No change.)
[(6) Policies with long term guarantees (that is, 25 years or 20 years at older issue ages) shall provide a non-forfeiture value no less than the traditional non-forfeiture value which would be required for that plan of term insurance.]
[(7)] (6) (No change in text.)
10 - 12. (No change.)