|
BULLETIN 2002-9 ALLOWABLE
SURRENDER CHARGE SCHEDULES FOR TO:
Product development actuaries
of companies FROM:
Merwin U. Stewart Utah Standard Nonforfeiture
Law for Individual Deferred Annuities (the Law), Utah Code Annotated (U.C.A.)
§ 31A-22-409, specifies minimum nonforfeiture values to be provided by an
annuity contract. There has
been some confusion as to the applicability of the Law to some product
designs. The purpose of this
Bulletin is to clarify the provisions of the Law related to the allowable
surrender charge schedules. Scope. The Law applies to
non-registered, general account contracts including traditional fixed
annuities, equity-indexed annuities, deposit type annuities, and market
value adjusted annuities. Maturity Date.
The Law defines maturity
date for the purpose of the nonforfeiture calculation.
It does not require that a contract terminates or that a
contractholder annuitizes by that date. For
the purpose of the nonforfeiture calculation, the maturity date is the
latest date permitted by the contract, but not later than age 70 or the
tenth anniversary of the contract, whichever is later.
For contracts that provide cash value
benefits, the Law requires that on and past the maturity date, the cash
value available under the contract must be equal to the amount used to
determine annuity payments. Retrospective Test.
For contracts that provide
cash value benefits, the Law requires that cash values available under the
contract be not less than a specified percentage of net considerations,
less withdrawals, loans, rider charges, and partial surrenders,
accumulated at 3% per year. Smoothness Test.
For contracts that provide
cash value benefits, cash values available prior to maturity shall be not
less than the amount that would have been available at maturity, arising
from the considerations paid prior to surrender, discounted at an interest
rate 1% higher than the interest rate specified in the contract for
accumulating the net consideration. Variable Annuities with
Fixed Sub-Accounts. Variable annuities, including registered modified
guaranteed annuities, are exempt from the Law, except that the fixed
sub-accounts within variable annuities, which are supported by the general
account assets, are subject to the Law.
The nonforfeiture values associated with the amounts held in the
fixed sub-accounts shall be at least as great as those required for a
fixed annuity contract. Products with Rolling
Surrender Charges.
Flexible premium contracts
may have separate surrender charge schedules associated with each premium
payment, provided that the nonforfeiture values are at least as great as
they would be had each premium payment been a separate single premium
contract (retrospective test shall be based on 90% of net considerations). The contract shall contain a partial withdrawal provision
that allows for withdrawal of monies subject to the smallest surrender
penalty first (commonly referred to as first-in first-out).
For the purpose of determining the maturity date, the tenth
anniversary of the contract shall be determined separately for each
premium payment. Products with Renewing
Surrender Charges.
Contracts that periodically
renew interest rate guarantees and surrender charges are in compliance
with the Law provided that the nonforfeiture values available under the
contract following each renewal are at least as great as they would be had
the contract been surrendered at renewal and a new contract issued. The contract shall provide for a reasonable time period at
renewal, during which the contract can be surrendered free of surrender
charges or any other penalties. For
the purpose of determining the maturity date, the tenth anniversary of the
contract shall be the tenth anniversary of the most recent renewal date.
Market Value
Adjustments.
Fixed annuities, supported
by the general account, that offer periods of fixed rate guarantees may
have nonforfeiture values that incorporate market value adjustments (MVAs).
To be fair to contractholders that partially bear the investment
risk, the MVAs shall equally reflect gains and losses, providing for up as
well as down adjustments. MVAs
are allowed only during the periods of fixed rate guarantees.
Application of the MVAs cannot result in cash surrender value lower
than the one resulting from the applicable retrospective test.
MVAs can be used in addition to the surrender charge schedule that
would have satisfied the smoothness test in the absence of the MVA. Bonuses.
Bonuses that are available
only for annuitization are prohibited.
Persistency and other bonuses are allowed as long as they are also
available in cash at maturity. For
the purpose of the nonforfeiture calculation, the bonus shall be treated
as an annual rate enhancement over the period during which the bonus is
earned. For the purpose of
the retrospective test, net considerations need not include the bonus
amount. For the purpose of smoothness test, the bonus amount shall be
considered a part of the maturity value, and the interest rate specified
in the contract for accumulating the net consideration shall reflect the
rate enhancement attributable to the bonus. Noncompliant Forms Pursuant to U.C.A. § 31A-21-201, Utah is a “File
and Use” state for annuity forms. U.C.A.
§ 31A-21-201(2) states in part, “the
insurer is responsible” for assuring those forms submitted for
use are in compliance with Utah Insurance Code and Rules. Insurers are advised to review all annuity forms currently
filed for use to make sure they are in compliance with Utah law.
If the forms are not in compliance, then insurers must cease
marketing the forms and file new or revised forms in accordance with the
filing rule and bulletin that are on the department’s website, www.insurance.utah.gov/industry.html.
When filing, refer to the content standards for deferred annuity
contracts posted on the website. DATED this 17th day of October, 2002 __________________________________ |