Relates to life insurance policies that credit additional amounts in accordance with an equity index

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 five 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 five 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 lite 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

New bill.

Fiscal implications

None to State.

Effective date

Immediately.