Relates to life insurance policies that credit additional amounts in accordance with an equity index.
TITLE OF BILL: An act to amend the insurance law, in relation to life insurance policies that credit additional amounts in accordance with an equity index
PURPOSE: The purpose of the bill is to permit indexed universal life insurance policies to credit additional amounts no less frequently than every three years.
SUMMARY OF PROVISIONS: Amends § 3203(a)(14), 3209 (b) and 4221 (n-1) of the insurance law to permit any policy that credits additional amounts in accordance with an equity index to do so more frequently than annually, provided that the policy shall state that the additional amounts will be credited no less frequently that every three years.
EXISTING LAW: Current law requires that all policies crediting additional amounts must credit such additional amounts no less frequently than annually. This annual crediting requirement places severe limitations on product design for equity indexed universal life insurance and limits the products available to New York consumers
JUSTIFICATION: A universal life policy provides flexibility to the purchaser of the policy. Unlike traditional "fixed" premium whole life policies, universal life policies allow for flexible premium payments both as to the timing and amount of premiums paid by the policy owner. A policy owner may make scheduled or unscheduled premium payments Universal life policies credit premium payments to a cash value account Each month, the insurer deducts insurance and administrative charges from the cash value account and credits the cash value account with an interest credit. Universal life policies must also comply with the usual guarantee requirements associated with such policies Amounts credited in excess of guaranteed amounts are referred to as "additional amounts" and such policies are known as excess interest policies
Universal life policies typically credit interest on a monthly basis based upon the insurer's declared interest rate Indexed universal life insurance policies are typical universal life insurance policies except that they utilize a crediting method linked to the performance of an external market index, e g , the S&P 500, rather than the insurer's declared interest rate Since 2003, the New York State Insurance Department has recognized equity indexed universal life insurance as a type of excess interest product. Since 2007, guidance from the Department confirmed that index credits on an equity index policy must occur no more frequently than annually.
This legislation offers New York consumers the opportunity to purchase indexed universal life insurance policies without the one year crediting limitation. The legislation allows consumers in New York to purchase universal life policies with index credits based upon an equity index that credits additional amounts over a period greater than one year but not more than three years By allowing interest crediting periods to exceed one year, insurers can offer greater values to policy holders since their hedging costs associated with
promised interest credits are reduced as the crediting period is extended beyond one year.
Several insurance companies currently offer equity indexed universal life policies using two, three and five year crediting periods to consumers outside of New York. A policy may use a single index in calculating excess interest or may offer more than one index chosen by the policy owner. Other policies may rely upon a combination of indexes and use a weighted formula to determine index credits, Such multiple index products allowing for even greater diversification than that achieved through the equity index in the calculation of index credits. Equity indexed policies typically all include a traditional declared or fixed rate option for determining interest rates along side the index equity option. In this way, the policy owner may choose to allocate premium payments between the fixed rate and the equity index formula to achieve even greater diversification.
Equity indexed policies provide many advantages over traditional universal life policies that rely upon an insurer's declared rate to credit policy interest. With a "declared" interest rate, the policy owner must rely upon the insurer's discretion in determining a declared rate usually based upon the insurer's expected return on its general account. By contrast, an insurer relinquishes discretion with an equity index policy and must credit interest strictly on the basis of the performance of the index subject only to a declared participation rate or cap on the amount of index credits offered. Once established, however, the insurer exercises no discretion in the amount of index credits and must strictly apply the formula applied to the policy equity index set forth in the policy.
What sets indexed universal life apart from more traditional universal life is the opportunity for cash value accumulation through index crediting potential based, in part, on the performance of a stock market index or indexes. Plus interest is guaranteed to be credited to the policy's cash value through a guaranteed minimum interest rate as required by law, regardless of whether index credits are applied to the policy. Through this combination of guarantees and index credits, a policy owner is afforded the potential of upside index accumulation should the equity index rise during the crediting period, Likewise, should the index decline during the index crediting period, the policy owner is protected through the guaranteed minimum interest rate. In this way, the policy owner gains exposure to equity markets without any risk of loss should markets decline.
In addition to the foregoing advantages of equity indexed universal life, policies that use index periods greater than one year have a historical advantage over one year indexed strategies. Higher indexed credits can be expected where the index crediting period exceeds one year In sum, the annual crediting requirement places severe limitations on product design for equity indexed universal life insurance and limits the products available to New York consumers. This legislation removes those limitations and provides New York consumers with greater product choice and the potential for higher returns on cash accumulations without risk of loss associated with market downturns.
LEGISLATIVE HISTORY: S .4039-A of 2011-12
FISCAL IMPLICATIONS: None to State.
EFFECTIVE DATE: Immediately.
STATE OF NEW YORK ________________________________________________________________________ 4171 2013-2014 Regular Sessions IN SENATE March 12, 2013 ___________Introduced by Sen. SEWARD -- read twice and ordered printed, and when printed to be committed to the Committee on Insurance AN ACT to amend the insurance law, in relation to life insurance poli- cies that credit additional amounts in accordance with an equity index THE PEOPLE OF THE STATE OF NEW YORK, REPRESENTED IN SENATE AND ASSEM- BLY, DO ENACT AS FOLLOWS: Section 1. Subparagraph (A) of paragraph 8 of subsection (a) of section 3203 of the insurance law is amended to read as follows: (A) that the policyholder shall be entitled to a loan at any time the policy is in force in an amount not exceeding the loan value, and under the conditions, specified in section four thousand two hundred twenty- two of this chapter, provided three full years' premiums have been paid or, in the case of policies that provide that the policyholder may vary the amount and frequency of premiums to be paid to the insurer, after three years from the issue of the policy, if the policy is not in default, PROVIDED THAT POLICIES CREDITING ADDITIONAL AMOUNTS IN ACCORD- ANCE WITH AN EQUITY INDEX SHALL BE ENTITLED TO A LOAN, ELECTED BY THE POLICY OWNER, AT ANY TIME DURING THE EQUITY INDEX PERIOD AND THAT, IN THE EVENT THAT A POLICY LOAN THAT REDUCES THE ACCOUNT VALUE IS ELECTED PRIOR TO THE END OF THE EQUITY INDEX PERIOD, THE ADDITIONAL AMOUNTS DETERMINED AT THE END OF THE EQUITY INDEX PERIOD SHALL REFLECT THE CHANGE IN ACCOUNT VALUES DURING SUCH EQUITY INDEX PERIOD; S 2. Paragraph 14 of subsection (a) of section 3203 of the insurance law is amended to read as follows: (14) (A) in any policy under which additional amounts may be credited for any period pursuant to subsection (b) of section four thousand two hundred thirty-two of this chapter, that states that the insurer shall credit any such amount no less frequently than annually during such period; PROVIDED THAT ANY POLICY THAT CREDITS ADDITIONAL AMOUNTS IN ACCORDANCE WITH AN EQUITY INDEX SHALL STATE THAT THE INSURER SHALL CRED- IT ANY SUCH AMOUNT NO LESS FREQUENTLY THAN EVERY THREE YEARS, ANDEXPLANATION--Matter in ITALICS (underscored) is new; matter in brackets [ ] is old law to be omitted. LBD06624-02-3 S. 4171 2
(B) THAT ANY POLICY CREDITING ADDITIONAL AMOUNTS IN ACCORDANCE WITH AN EQUITY INDEX LESS FREQUENTLY THAN ANNUALLY SHALL ALSO OFFER AN OPTION THAT CREDITS ADDITIONAL AMOUNTS NO LESS FREQUENTLY THAN ANNUALLY. S 3. Subparagraph (I) of paragraph 2 of subsection (b) of section 3209 of the insurance law is relettered subparagraph (J) and a new subpara- graph (I) is added to read as follows: (I) FOR A LIFE INSURANCE POLICY CREDITING ADDITIONAL AMOUNTS IN ACCORDANCE WITH AN EQUITY INDEX LESS FREQUENTLY THAN ANNUALLY, STATE- MENTS THAT NO ADDITIONAL AMOUNTS WILL BE CREDITED TO THE EQUITY INDEX ACCOUNT OF THE POLICY IF THE POLICYHOLDER FULLY SURRENDERS THE POLICY PRIOR TO THE EXPIRATION OF THE EQUITY INDEX CREDITING PERIOD, SO THE POLICYHOLDER SHOULD CONSIDER OTHER ALTERNATIVES TO FULL SURRENDER BEFORE THAT PERIOD EXPIRES, SUCH AS A POLICY LOAN OR A PARTIAL SURRENDER FROM THE EQUITY INDEX ACCOUNT; AND S 4. Subsection (b) of section 3209 of the insurance law is amended by adding a new paragraph 3 to read as follows: (3) A LIFE INSURANCE POLICY CREDITING ADDITIONAL AMOUNTS IN ACCORDANCE WITH AN EQUITY INDEX LESS FREQUENTLY THAN ANNUALLY SHALL DISCLOSE TO THE POLICYHOLDER AT THE TIME OF A REQUEST FOR FULL SURRENDER OF THE POLICY BY THE POLICYHOLDER PRIOR TO THE EXPIRATION OF THE EQUITY INDEX PERIOD THAT NO ADDITIONAL AMOUNTS WILL BE CREDITED TO THE EQUITY INDEX ACCOUNT OF THE POLICY IF THE POLICYHOLDER FULLY SURRENDERS THE POLICY PRIOR TO THE EXPIRATION OF THE EQUITY INDEX PERIOD SO THE POLICYHOLDER SHOULD CONSIDER OTHER ALTERNATIVES TO FULL SURRENDER BEFORE THAT PERIOD EXPIRES, SUCH AS A POLICY LOAN OR A PARTIAL SURRENDER FROM THE EQUITY INDEX ACCOUNT. S 5. The opening paragraph of paragraph 3 of subsection (n-1) of section 4221 of the insurance law, as added by chapter 365 of the laws of 1986, is amended to read as follows: A policy that meets the requirements of this subsection must provide for cash surrender values that meet the requirements of either subpara- graph (A) or subparagraph (B) and comply with the provisions of subpara- graphs (C) and (D) of this paragraph, PROVIDED THAT, FOR PARTIAL SURREN- DERS UNDER POLICIES THAT CREDIT ADDITIONAL AMOUNTS IN ACCORDANCE WITH AN EQUITY INDEX LESS FREQUENTLY THAN ANNUALLY, THE ADDITIONAL AMOUNTS DETERMINED AT THE END OF THE EQUITY INDEX PERIOD SHALL REFLECT THE CHANGE IN ACCOUNT VALUES DURING SUCH EQUITY INDEX PERIOD. S 6. This act shall take effect immediately.