Life Insurance Illustrations Model Regulation - 582 - Snippets - (LIIIMR)
- NAIC Model Laws, Regulations, Guidelines and Other Resources—January 2011
- LIFE INSURANCE ILLUSTRATIONS MODEL REGULATION - PC-582-1
- Proceeding Citations - All references are to the Proceedings of the NAIC - Snippets - [BonkNote]
- 1993 Proc. IB 794
- In November 1992 a working group [Life Disclosure Working Group] was formed in response to a letter from a United States senator [Howard Metzenbaum - (D-OH)] regarding the adequacy of information disclosed or available to consumers of life insurance.
- One of the senator’s main concerns was computer generated sales illustrations. A working group was appointed and began by investigating the nature and extent of the problems that existed with respect to illustrations.
- The chair [Mike Weaver - AL] said that, judging by the amount of activity being undertaken regarding policy illustrations by other organizations, it seemed likely that there were some problems that required a regulatory response.
- One working group member [Bob Katz - OH] noted that misrepresentations were prohibited in practically every state’s unfair trade practices law.
- He said his state did not have any specific guidelines or parameters regulating sales illustrations, but if a policy illustration was used in a misrepresentative manner, the state could and would intervene.
- 1993 Proc. IB 795.
- The working group noted the NAIC Rules Governing the Advertising of Life Insurance contained requirements concerning the advertising or illustration of non-guaranteed elements but acknowledged that they had not been widely adopted.
- 1993 Proc. IB 789.
- One regulator [W. Harold Phillips, Senior Life Actuary - CA] summarized the problem in his department (Attachment Two-A):
- Misleading illustrations are structured as inducements to buy rather than helpful tools to understand the workings of the product or as a comparison between products of competing companies.
- In addition, many purchasers as well as agents do not understand what an illustration is and what it is not.
- Most agents, companies and actuaries agree that there is a problem and that something needs to be done.
- The industry appears to be in gridlock on the matter.
- 1993 Proc. IB 788.
- Another regulator [Tony Higgins - N.C.] noted that considerable work and effort had gone into revisions of the Life Insurance Disclosure Model Regulation in the mid to late 1980s to address concerns with policy illustrations with respect to universal life insurance.
- It was suggested that these revisions should be used as a starting point regarding policy illustrations.
- 1993 Proc. IB 788
- An actuary [Judy Faucett] reported on a study [preliminary report (Attachment Two-B), Final Report of the Task Force for Research on Life Insurance Sales] completed by an association of actuaries [Society of Actuaries] on the nature and extent of problems that exist with respect to policy illustrations.
- As a result of a survey, the association’s task force on illustrations determined that consumers do not understand illustrations or how they should be used.
- 1993 Proc. IB 788-789
- A consumer advocate [James Hunt (NICO now Consumer Federation of America] cited manipulation of mortality assumptions, sales misrepresentation regarding “vanishing” premium policies, manipulation of surrender charges, and bonus abuses as additional areas of concern.
- An actuary [Bart Munson, (William M. Mercer Inc.)] cautioned that life insurance disclosure issues have been the subject of ongoing debate since the 1970s, and addressing the problems could be an extremely challenging and time-consuming effort.
- 1993 Proc. 1st Quarter 251-262
- An agents’ association representative [Robert M. Nelson - (NALU , Currently named NAIFA)] reported that his group was concerned about problems because agents are generally the first to hear the disappointments, confusion and bitterness created by the unrealized expectations of policyholders.
- Of paramount concern to agents is the fact that illustrations may not be supportable under current actuarial standards of practice.
- He asked the group to concentrate on the serious problems caused when illustrations of non-guaranteed elements and dividends are not supportable for even a few years into the future and tend to overstate the amount of non-guaranteed elements and dividends likely to be paid.
- The association recommended more precise definitions and stricter rules on supportability and current experience. The association also asked the NAIC to take action to sensitize policyholders to the effect of a change in interest rates, and to mandate a signed disclosure statement where the consumer acknowledges he has read the illustration and understands it.
- 1993 Proc. 1st Quarter 263-265
- Technical resource advisors [Chair - George Coleman, Prudential, Industry Group] pointed out that vanishing premium illustrations should include an explanation that premiums only vanish if assumptions reflected in the illustration continue unchanged into the future.
- The advisors did not favor disclosure of the assumptions underlying policy performance because they were so complex.
- They were concerned about being able to explain, in an understandable way, the multitude of assumptions with a bearing on policy performance.
Section 1. Purpose
The purpose of this regulation is to provide rules for life insurance policy illustrations that will protect consumers and foster consumer education.
The goals of this regulation are to ensure that illustrations do not mislead purchasers of life insurance and to make illustrations more understandable
Section 4. Definitions
B. “Contract premium” means the gross premium that is required to be paid under a fixed premium policy, including the premium for a rider for which benefits are shown in the illustration.
C. “Currently payable scale” means a scale of non-guaranteed elements in effect for a policy form as of the preparation date of the illustration or declared to become effective within the next ninety-five (95) days."
H. “Illustration” means a presentation or depiction that includes non-guaranteed elements of a policy of life insurance over a period of years and that is one of the three (3) types defined below:
(1) “Basic illustration” means a ledger or proposal used in the sale of a life insurance policy that shows both guaranteed and non-guaranteed elements.
(2) “Supplemental illustration” means an illustration furnished in addition to a basic illustration that meets the applicable requirements of this regulation, and that may be presented in a format differing from the basic illustration, but may only depict a scale of non-guaranteed elements that is permitted in a basic illustration.
(3) “In force illustration” means an illustration furnished at any time after the policy that it depicts has been in force for one year or more.
E. “Generic name” means a short title descriptive of the policy being illustrated such as “whole life,” “term life” or “flexible premium adjustable life.”
F. “Guaranteed elements” and “non-guaranteed elements”
(1) “Guaranteed elements” means the premiums, benefits, values, credits or charges under a policy of life insurance that are guaranteed and determined at issue.
(2) “Non-guaranteed elements” means the premiums, benefits, values, credits or charges under a policy of
life insurance that are not guaranteed or not determined at issue.
G. “Illustrated scale” means a scale of non-guaranteed elements currently being illustrated...."
H. “Illustration” means a presentation or depiction that includes non-guaranteed elements of a policy of life insurance over a period of years and that is one of the three (3) types defined below:
(1) “Basic illustration” means a ledger or proposal used in the sale of a life insurance policy that shows both guaranteed and non-guaranteed elements.
(2) “Supplemental illustration” means an illustration furnished in addition to a basic illustration that meets the applicable requirements of this regulation, and that may be presented in a format differing from the basic illustration, but may only depict a scale of non-guaranteed elements that is permitted in a basic illustration.
(3) “In force illustration” means an illustration furnished at any time after the policy that it depicts has been in force for one year or more.
N. “Premium outlay” means the amount of premium assumed to be paid by the policy owner or other premium payer out-of-pocket.
Section 5. Policies to Be Illustrated
A. Each insurer marketing policies to which this regulation is applicable shall notify the commissioner whether a policy form is to be marketed with or without an illustration. For all policy forms being actively marketed on the effective date of this regulation, the insurer shall identify in writing those forms and whether or not an illustration
will be used with them. For policy forms filed after the effective date of this regulation, the identification shall be made at the time of filing. Any previous identification may be changed by notice to the commissioner.
Section 6. General Rules and Prohibitions
A. An illustration used in the sale of a life insurance policy shall satisfy the applicable requirements of this regulation, be clearly labeled “life insurance illustration” and contain the following basic information:
(1) Name of insurer;
(2) Name and business address of producer or insurer’s authorized representative, if any;
(3) Name, age and sex of proposed insured, except where a composite illustration is permitted under this regulation;
(4) Underwriting or rating classification upon which the illustration is based;
(5) Generic name of policy, the company product name, if different, and form number;
(6) Initial death benefit; and
(7) Dividend option election or application of non-guaranteed elements, if applicable.
B. When using an illustration in the sale of a life insurance policy, an insurer or its producers or other authorized representatives shall not:
(1) Represent the policy as anything other than a life insurance policy;
(2) Use or describe non-guaranteed elements in a manner that is misleading or has the capacity or tendency to mislead;
(3) State or imply that the payment or amount of non-guaranteed elements is guaranteed;
(4) Use an illustration that does not comply with the requirements of this regulation;
(5) Use an illustration that at any policy duration depicts policy performance more favorable to the policy owner than that produced by the illustrated scale of the insurer whose policy is being illustrated;
(6) Provide an applicant with an incomplete illustration;
(7) Represent in any way that premium payments will not be required for each year of the policy in order to maintain the illustrated death benefits, unless that is the fact;
(8) Use the term “vanish” or “vanishing premium,” or a similar term that implies the policy becomes paid up, to describe a plan for using non-guaranteed elements to pay a portion of future premiums;
(9) Except for policies that can never develop nonforfeiture values, use an illustration that is “lapse supported”; or
(10) Use an illustration that is not “self-supporting.”