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ANNUITY DISCLOSURE MODEL REGULATION
(To be adopted by State Legislatures)

Draft: 9/15/98

The NAIC solicits comments on this draft. Comments should be addressed to Carolyn Johnson, NAIC, 120 W. 12th Street, Suite 1100, Kansas City, Missouri 64105.

Underlining shows changes from the 6/23/98 draft.


Table of Contents

Section 1. Purpose

Section 2. Authority

Section 3. Applicability and Scope

Section 4. Definitions

Section 5. Standards for the Disclosure Document and Buyer's Guide

Section 6. Report to Contract Owners

Section 7. Penalties

Section 8. Separability

Section 9. Effective Date

Appendix A. Buyer's Guide

Section 1. Purpose

The purpose of this regulation is to provide standards for the disclosure of certain minimum information about annuity contracts to protect consumers and foster consumer education. The regulation specifies the minimum information which must be disclosed and the method for disclosing it in connection with the sale of annuity contracts. The goal of this regulation is to ensure that purchasers of annuity contracts understand certain basic features of annuity contracts.

Section 2. Authority

This regulation is issued based upon the authority granted the commissioner under Section [cite any enabling legislation and state law corresponding to Section 4 of the NAIC Unfair Trade Practices Act].

Section 3. Applicability and Scope

This regulation applies to all group and individual annuity contracts and certificates except:

A.  Registered or non-registered variable annuities or other registered products;

B.  Immediate and deferred annuities that contain no nonguaranteed elements.

C.  (1)  Annuities used to fund:

(a)   An employee pension plan which is covered by the Employee Retirement Income Security Act (ERISA);
(b)   A plan described by Sections 401(a), 401(k), 403(b) of the Internal Revenue Code, where the plan, for purposes of ERISA, is established or maintained by an employer,
(c)   A governmental or church plan defined in Section 414 or a deferred compensation plan of a state or local government or a tax exempt organization under Section 457 of the Internal Revenue Code; or
(d)   A nonqualified deferred compensation arrangement established or maintained by an employer or plan sponsor.

 (2)  Notwithstanding Paragraph (1), the regulation shall apply to annuities used to fund a plan or arrangement that is funded solely by contributions an employee elects to make whether on a pre-tax or after-tax basis, and where the insurance company has been notified that plan participants may choose from among two (2) or more fixed annuity providers and there is a direct solicitation of an individual employee by a producer for the purchase of an annuity contract. As used in this subsection, direct solicitation shall not include any meeting held by a producer solely for the purpose of educating or enrolling employees in the plan or arrangement;

D.  Structured settlement annuities;

E.  [Charitable gift annuities; and]

F.  [Funding agreements].

Drafting Note: States that regulate charitable gift annuities should exempt them from the requirements of this regulation. States that recognize or regulate funding agreements as annuities should exempt them from the requirements of this regulation.

Section 4. Definitions

For the purposes of this regulation:

A. ["Charitable gift annuity" means a transfer of cash or other property by a donor to a charitable organization in return for an annuity payable over one or two lives, under which the actuarial value of the annuity is less than the value of the cash or other property transferred and the difference in value constitutes a charitable deduction for federal tax purposes, but does not include a charitable remainder trust or a charitable lead trust or other similar arrangement where the charitable organization does not issue an annuity and incur a financial obligation to guarantee annuity payments.]

B. "Contract owner" means the owner named in the annuity contract or certificate holder in the case of a group annuity contract.

C. "Determinable elements" means elements that are derived from processes or methods that are guaranteed at issue and not subject to company discretion, but where the values or amounts cannot be determined until some point after issue. These elements include the premiums, credited interest rates (including any bonus), benefits, values, non-interest based credits, charges or elements of formulas used to determine any of these. These elements may be described as guaranteed but not determined at issue. An element is considered determinable if it was calculated from underlying determinable elements only, or from both determinable and guaranteed elements.

D. ["Funding agreement" means an agreement for an insurer to accept and accumulate funds and to make one or more payments at future dates in amounts that are not based on mortality or morbidity contingencies.]

E. "Generic name" means a short title descriptive of the annuity contract being applied for or illustrated such as "single premium deferred annuity."

F. "Guaranteed elements" means the benefits, values, credits and charges under an annuity contract that are guaranteed and determined at issue. premiums, credited interest rates (including any bonus), benefits, values, non-interest based credits, charges or elements of formulas used to determine any of these, that are guaranteed and determined at issue. An element is considered guaranteed if all of the underlying elements that go into its calculation are guaranteed.

G. "Non-guaranteed elements" means the benefits, values, credits and charges under an annuity contract that are not guaranteed or not determined at issue premiums, credited interest rates (including any bonus), benefits, values, non-interest based credits, charges or elements of formulas used to determine any of these, that are subject to company discretion and are not guaranteed at issue. An element is considered non-guaranteed if any of the underlying non-guaranteed elements are used in its calculation.

H. "Structured settlement annuity" means a "qualified funding asset" as defined in section 130(d) of the Internal Revenue Code or an annuity that would be a qualified funding asset under section 130(d) but for the fact that it is not owned by an assignee under a qualified assignment.

Section 5. Standards for the Disclosure Document and Buyer's Guide

A.   An applicant for an annuity contract shall be given both a disclosure document as described in Subsection C and the Buyer's Guide contained in Appendix A at the time of application in a face-to-face meeting or, in the case of a sale conducted by means of direct solicitation through the telephone, mails, the Internet, or other mass communication media, within two (2) business days after the application is received by the insurer.
 
B.  The insurer shall makes reasonable efforts to assure that the Buyer's Guide is made available to prospective applicants.  An insurer may demonstrate it has made reasonable efforts by:

(1)  Working, individually or within an association, with regulators in its state of domicile to present public service announcements regarding the availability of the Buyer's Guide.

(2)  Encouraging its producers to use the Buyer's Guide in mailings to or in seminars for potential purchasers or in other communications with clients;

(3)  Including in any newsletters sent to contract owners an nnouncement of the availability of the Buyer's Guide; or

(4)   Including the Buyer's Guide on its website and encouraging individual representatives or other intermediaries to do the same.

C.  At a minimum, the following information shall be included in the disclosure document required to be provided under this regulation:

(1)  The generic name of the contract, the company product name, if different, and form number, and the fact that it is an annuity;

(2)  The insurer's name and address;

(3)  A description of the contract and its benefits, emphasizing its long-term nature, including examples where appropriate:

(a) The guaranteed, non-guaranteed and determinable elements of the contract, and their limitations, if any, and an explanation of how they operate;

(b) An explanation of the initial crediting rate, specifying any bonus or introductory portion, the duration of the rate and the fact that rates may change from time to time and are not guaranteed;

(c) Periodic income options both on a guaranteed and non-guaranteed basis;

(d) Any value reductions caused by withdrawals from or surrender of the contract;

(e) How values in the contract can be accessed;

(f) The death benefit, if available and how it will be calculated;

(g) A summary of the federal tax status of the contract and any penalties applicable on withdrawal of values from the contract; and

(h) Impact of any rider, such as a long-term care rider.

(4)   Specific dollar amount or percentage charges and fees shall be listed with an explanation of how they apply.

(5)   Information about the current guaranteed rate for new policies that contains a clear notice that the rate is subject to change.

Section 6.  Report to Contract Owners

For annuities in the payout period with changes in non-guaranteed elements and for the accumulation period of a deferred annuity, the insurer shall provide each contract owner with a report, at least annually, on the status of the contract that contains at least the following information:

A. The beginning and end date of the current report period;

B. The accumulation and cash surrender value, if any, at the end of the previous report period and at the end of the current report period;

Drafting Note: States adopting this regulation with an effective date before July 1, 2000 should consider a delayed effective date for including the cash surrendar value that is after June 30, 2000 because it appears programming changes may be required for many insurers.

C. The total amounts, if any; that have been credited, or charged to the contract value or paid during the current report period; and

D. The amount of outstanding loans, if any, as of the end of the current report period.

Section 7. Penalties

In addition to any other penalties provided by the laws of this state, an insurer or producer that violates a requirement of this regulation shall be guilty of a violation of Section [cite state's unfair trade practices act].

Section 8. Separability

If any provision of this regulation or its application to any person or circumstance is for any reason held to be invalid by any court of law, the remainder of the regulation and its application to other persons or circumstances shall not be affected.

Section 9. Effective Date

This regulation shall become effective [insert effective date] and shall apply to policies sold on or after the effective date.