Legislation

Search OpenLegislation Statutes
This entry was published on 2014-09-22
The selection dates indicate all change milestones for the entire volume, not just the location being viewed. Specifying a milestone date will retrieve the most recent version of the location before that date.
SECTION 4223
Standard nonforfeiture law for annuities
Insurance (ISC) CHAPTER 28, ARTICLE 42
§ 4223. Standard nonforfeiture law for annuities. (a) (1) In the case
of contracts issued on or after the operative date of this section, no
contract of annuity, except as provided in subsection (b) of this
section, shall be delivered or issued for delivery in this state unless
it contains in substance the following provisions, or corresponding
provisions that in the opinion of the superintendent are at least as
favorable to the contract holder, upon cessation of payment of
considerations under the contract.

(A) That upon cessation of payment of considerations under a contract,
the company will grant a paid-up annuity benefit on a plan stipulated in
the contract of such value as is specified in subsections (d), (f), (g)
and (i) of this section.

(B) If a contract provides for a full or partial lump sum settlement
at maturity, or at any other time, that upon full or partial surrender
of the contract at the commencement of any annuity payments or prior
thereto at times specified in the contract (which shall not be less
frequently than once every ten years after the issuance of the
contract), the company will pay in lieu of any paid-up annuity benefit a
cash surrender benefit (for the portion of the contract surrendered, if
the contract permits partial surrenders) in an amount meeting the
requirements of paragraph one of subsection (e) of this section. The
contract may provide for a cash surrender benefit on any other date or
dates meeting the requirements of paragraph one or two of subsection (e)
of this section. The company shall reserve the right to defer the
payment of such cash surrender benefit for a period of six months after
demand therefor with surrender of the contract. This subparagraph shall
not apply to any contract qualified for special tax treatment under
subsection (b) of section four hundred three of the Internal Revenue
Code to the extent such application would prevent such qualification.

(C) A statement of the mortality table, if any, and interest rates
used in calculating any minimum paid-up annuity during the period it is
guaranteed, and any cash surrender or death benefits that are guaranteed
under the contract, and any times at which such guaranteed benefits are
payable, together with sufficient information to determine the amounts
of such benefits and, if the contract provides for the determination of
any cash surrender value in accordance with a market-value adjustment
formula authorized by paragraph two of subsection (e) of this section, a
brief description of the formula and the circumstances in which it is
applied, together with a statement that a detailed description has been
filed with the superintendent.

(D) A statement that any paid-up annuity, cash surrender or death
benefits that may be available under the contract are not less than the
minimum benefits required by any statute of the state in which the
contract is delivered and an explanation of the manner in which such
benefits are altered by the existence of any additional amounts credited
by the company to the contract, any indebtedness to the company on the
contract or any prior withdrawals from or partial surrenders of the
contract.

(E) A statement that the annuity benefits at the time of their
commencement will not be less than those that would be provided by the
application of an amount, hereinafter defined, to purchase any single
consideration immediate annuity contract offered by the company at the
time to the same class of annuitants. For contracts that provide cash
surrender benefits, such amount shall be the greater of the cash
surrender benefit or ninety-five percent of what the cash surrender
benefit would be if there were no withdrawal charge. For contracts that
do not provide cash surrender benefits, such amount shall be the present
value of the paid-up annuity benefit provided under the contract in
accordance with subsection (d) of this section. This statement will not
affect the amount of any benefits required to be provided under any
other provision of this section.

(2) Notwithstanding the requirements of this subsection, any deferred
annuity contract may provide that if no considerations have been
received under a contract for a period of three full years and either
(A) the actual accumulation amount as hereinafter defined would be less
than five thousand dollars or the dollar limit established pursuant to
subparagraph A of paragraph 11 of subsection (a) of section four hundred
eleven of the internal revenue code of 1986, as amended, or (B) the
portion of the paid-up annuity benefit at maturity on the plan
stipulated in the contract arising from considerations paid prior to
such period would be less than twenty dollars monthly, calculated on the
basis of the mortality table, if any, and the interest rate, if any,
specified in the contract for determining the paid-up annuity benefits,
the company may at its option terminate such contract by payment of the
actual accumulation amount and by such payment shall be relieved of any
further obligation under such contract.

(b) (1) This section shall not apply to any:

(A) Reinsurance.

(B) Group annuity contract purchased in connection with one or more
retirement plans or plans of deferred compensation established or
maintained by or for one or more employers (including partnerships or
sole proprietorships), employee organizations, or any combination
thereof, except as otherwise provided in this subsection.

(C) Premium deposit fund.

(D) Variable annuity.

(E) Immediate annuity.

(F) Deferred annuity contract or group annuity certificate after
annuity payments have commenced.

(G) Reversionary annuity.

(H) Contract delivered outside this state through an agent or other
representative of the company issuing the contract or through a broker,
except as otherwise provided in this subsection.

(2) This section shall apply to any certificate issued, or issued for
delivery, under a group annuity contract (other than a group annuity
contract issued to an employee benefit plan within the meaning of the
federal employee retirement income security act of 1974, 29 U.S.C. §1001
et seq.) to a person solicited for the sale of such certificate in this
state if:

(A) such certificate provides benefits under an individual retirement
account or is issued as an individual retirement annuity, both as
defined in section four hundred eight of the Internal Revenue Code,
except for a simplified employee pension as defined in subsection (k) of
section four hundred eight of such code; or

(B) such certificate is issued as an annuity contract in accordance
with subsection (b) of section four hundred three of such code under a
program for the purchase of such annuity contract where the payments are
derived wholly from a salary reduction agreement or an agreement to
forego an increase in salary; or

(C) the benefits provided under such group annuity contract are
derived wholly from funds contributed by the persons covered thereunder.

(c) (1) Except as provided in paragraph four of this subsection, the
minimum values as specified in subsections (d), (e), (f), (g) and (i) of
this section of any paid-up annuity, cash surrender or death benefits
attributable to any account subject to this section under an annuity
contract shall be based (except as provided in subsection (e) of this
section with respect to the use of a market-value adjustment formula)
upon the actual accumulation amount computed as provided in this
subsection. For contracts that provide a cash surrender benefit prior to
the commencement of annuity payments, the death benefit attributable to
any account, other than an equity index account, shall not be less than
the actual accumulation amount, as defined in paragraph two of this
subsection, and the death benefit attributable to an equity index
account shall not be less than the value of the equity index account, as
defined in paragraph four of this subsection.

(2) The "actual accumulation amount" with respect to an account other
than an equity index account at any time at or prior to the commencement
of any annuity payments is:

(A) the net considerations credited to such account; minus

(B) premium taxes and premium charges attributable to the account;
plus

(C) interest (which shall not be less in any year than the minimum
annual effective rate of interest as specified in subparagraph (F) of
this paragraph applied to the sum of the actual accumulation amount and
the amount of any indebtedness to the company on the contract
attributable to the account), additional amounts and dividends, credited
by the company to the account; minus

(D) administrative charges (which shall not exceed fifty dollars per
year per contract); minus

(E) the sum of (i) the amount appropriate according to the terms of
the contract to reflect transfers to other accounts, any prior
withdrawals from or partial surrenders of the account and (ii) the
amount of any indebtedness to the company attributable to such account,
including interest due and accrued.

(F) the minimum annual effective rate of interest shall be the lesser
of three percent and the following:

(i) the five-year constant maturity treasury rate reported by the
federal reserve as of a date, or average over a period, within the
fifteen months prior to the contract issue or redetermination date
rounded to the nearest one-twentieth of one percent;

(ii) reduced by one hundred twenty-five basis points; and

(iii) where the resulting minimum guaranteed interest rate is not less
than one percent. The minimum annual effective rate of interest at issue
shall be specified in the contract. The basis and calculation for
setting the minimum annual effective rate of interest at issue of a
contract shall be filed with the superintendent. If the contract
provides that the minimum annual effective rate of interest may be
redetermined, the redetermination date, basis, calculation and period
shall be stated in the contract. The basis is the date or average over a
specified period that produces the values of the five-year constant
maturity treasury rate to be used at each redetermination date or at
issue.

(3)(A) "Net considerations" means the gross considerations credited to
the account (including transfers from other accounts under the contract)
less contract charges allocated to the account, but net considerations
shall not, for any contract year for any account, be less than zero.

(B) "Contract charges" means the fixed dollar charges provided for in
the contract (subject to any maximum limit based on the amount of annual
considerations credited to the contract) but shall not exceed fifty
dollars in any year.

(C) "Premium charge percentage" means a charge provided for in the
contract based on a percentage of net considerations credited to the
contract but shall not exceed (i) ten percent of any net consideration
so credited if the contract does not contain a market-value adjustment
formula or (ii) seven percent of any net consideration so credited if
the contract contains a market-value adjustment formula.

(D) "Premium specific" when applied to a contract means that each net
consideration credited to the contract is associated with a portion of
the actual accumulation amount under the contract and of the amount of
any indebtedness under the contract to the company and that a separate
withdrawal charge percentage is applicable to each such portion.

(4)(A) The minimum values as specified in subsections (d), (e), (f),
(g) and (i) of this section of any paid-up annuity, cash surrender or
death benefits available under an equity index account in an annuity
contract shall be based upon the greater of the minimum accumulation
value and the equity index value, as defined in this paragraph, provided
that:

(i) at least once every ten years the minimum accumulation value and
the equity index value will be reset to equal the greater of the two
values; and

(ii) the value of an equity index account during any contract year may
not be less than the value of the equity index account at the start of
the contract year plus net considerations credited to the equity index
account during the contract year less transfers, withdrawals and
surrenders from the equity index account during the contract year.

(iii) if an amount is withdrawn from the equity index account, the
greater of the minimum accumulation value and the equity index value
shall not be reduced by more than the amount withdrawn. The lesser of
the two values shall not be reduced by more than the amount withdrawn
multiplied by the ratio of the lesser of the two values to the greater
of the two values.

(B) The minimum accumulation value for an equity index account shall
equal the actual accumulation amount, as defined in paragraph two of
this subsection, with the following adjustments:

(i) the amounts added pursuant to subparagraph (C) of paragraph two of
this subsection shall not include any additional amounts, but shall
include the amounts, if any, credited to the minimum accumulation value
when values are reset in accordance with item (i) of subparagraph (A) of
this paragraph; and

(ii) the reduction described in item (ii) of subparagraph (F) of
paragraph two of this subsection may be increased by not more than one
percent upon demonstration satisfactory to the superintendent that the
present value of the additional reduction does not exceed the market
value of the benefit at the contract issue date, and, if applicable, at
each date thereafter that the guaranteed interest rate, or equity index
formula, can be changed.

(C) The equity index value shall equal the actual accumulation amount
as defined in paragraph two of this subsection, with the following
adjustments:

(i) the amounts added pursuant to subparagraph (C) of paragraph two of
this subsection shall not include any interest; but shall include the
amounts, if any, credited based on an equity index formula and the
amounts, if any, credited to the equity index value when values are
reset in accordance with item (i) of subparagraph (A) of this paragraph;

(ii) the amounts credited to the equity index value shall be based
upon an equity index formula specified in the contract meeting the
requirements of subparagraph (D) of this paragraph; and

(iii) the equity index value at the end of any contract year may not
be less than the equity index value at the start of the contract year
plus net considerations credited to the equity index account during the
contract year less transfers, withdrawals and surrenders from the equity
index account during the contract year.

(D) The equity index formula shall be based on:

(i) a percentage change in an equity index;

(ii) guaranteed factors, such as participation rates, margins, caps
and floors that adjust the percentage change in the equity index or
where such factors are not guaranteed but subject to change after
contract issue and:

(I) such changes occur not more frequently than annually;

(II) such changes are limited by guaranteed factors stated in the
contract; and

(III) the use of factors other than the guaranteed factors stated in
the contract are considered additional amounts within the meaning of
subsection (a) of section four thousand two hundred thirty-two of this
article.

(iii) be applied not more frequently than monthly nor less frequently
than annually; and

(iv) use the equity index value as the base to which the percentage
change in the equity index as modified by factors in the formula is
applied.

(v) in the absence of withdrawals and net considerations, not result
in a percentage change in the equity index value over a contract year of
less than the percentage change in the equity index as adjusted and
applied by the terms of the contract.

(E) The contract shall describe:

(i) the equity index used in the formula, including any alternative
index should the equity index no longer be publicly available;

(ii) the period of time over which the percentage change in the index
is calculated;

(iii) any initial participation rate, margin, cap, floor or other
factor used to adjust the percentage change in the equity index, the
period or periods of time for which such factor is applicable and if the
factor is subject to change after the contract is issued, the maximum or
minimum as applicable for such factor over the contract's lifetime and
the procedures for determining and disclosing any change in such factor;
and

(iv) the application of the equity index formula.

(d) Any paid-up annuity benefit available under a contract shall be
such that its present value on the date annuity payments are to commence
is at least equal to the actual accumulation amount on that date. Such
present value shall be computed using the mortality table, if any, and
the interest rate, if any, specified in the contract for determining any
minimum paid-up annuity benefits guaranteed in the contract.

(e) (1) A cash surrender benefit that meets the requirements of this
paragraph shall not be less than the excess of (i) the actual
accumulation amount over (ii) the withdrawal charge percentage times the
sum of (I) the actual accumulation amount and (II) the amount of any
indebtedness under the contract to the company. Subject to the foregoing
sentence and section four thousand two hundred thirty-two of this
article, such benefit may be determined in any manner established
pursuant to authority granted by the board of directors of the company
or a committee thereof (including any formula that takes into account
changes in interest rates of publicly-traded obligations or other
investments).

(2) A cash surrender benefit that meets the requirements of this
paragraph shall not be less than the excess of (i) the actual
accumulation amount, as adjusted by a market-value adjustment formula,
over, if the contract is not premium specific, (ii) the withdrawal
charge percentage times the sum of (I) the actual accumulation amount,
as adjusted by such market-value adjustment formula and (II) the amount
of any indebtedness under the contract to the company or, if the
contract is premium specific, (iii) the aggregate of such withdrawal
charge percentage under the contract times the sum of (I) the
corresponding portion of the actual accumulation amount, as adjusted by
such market-value adjustment formula, and (II) the corresponding portion
of the amount of any indebtedness under the contract to the company.

(3) (A) If the cash surrender benefit is computed on the basis of the
actual accumulation amount without adjustment by a market-value
adjustment formula and the contract does not include an equity index
account, "withdrawal charge percentage" means a percentage not greater
than ten percent less the premium charge percentage, if any, provided
for under the contract.

(B) If the contract has an equity index account, "withdrawal charge
percentage" for such account means the percentage provided in
subparagraph (A) of this paragraph reduced by one percent for each year
beginning after the third year the contract has been in force and
further reduced to zero after the tenth year the contract has been in
force.

(4) If the cash surrender benefit is computed on the basis of the
actual accumulation amount adjusted by a market value adjustment
formula, "withdrawal charge percentage" means a percentage not greater
than seven percent reduced by one percent for each year the contract has
been in force or, if the contract is premium specific, for each year
after the net consideration associated with such withdrawal charge
percentage was credited to the contract and less the premium charge
percentage, if any, provided in the contract (but not less than zero).
After any period during which interest was credited to the contract at a
specified rate and the company, pursuant to the contract, set a new
specified rate and a new period during which such rate is to be so
credited, the withdrawal charge percentage for such new period shall be
a percentage not in excess of the greater of (A) any remaining
withdrawal charge percentage at the beginning of the new period and (B)
the lesser of (i) five percent and (ii) one percent times the number of
years in such new period, reduced (but not below zero) by one percent
for each year the contract remains in force during such period,
provided, however, that the withdrawal charge percentage for such new
period shall be zero unless the contract provides for a date, within
thirty days of the last day of such new period, on which the contract
may be surrendered for a cash surrender benefit determined without the
use of a market-value adjustment formula.

(5) "Market-value adjustment formula" means a formula which is
described in the contract for increasing and decreasing the actual
accumulation amount in order to determine cash surrender values payable
in accordance with subparagraph (B) of paragraph one of subsection (a)
of this section and which takes into account (i) changes in interest
rates on publicly-traded obligations or other investments or in interest
rates provided in, or declared pursuant to, contracts of the same class
as the contract being surrendered and (ii) the length of time between
the date on which the contract is surrendered and the next date on which
the contract would have provided cash surrender benefits determined
without the use of any market-value adjustment formula. The
superintendent may promulgate reasonable regulations to define
permissible forms of market-value adjustment formulae.

(f) For contracts which do not provide cash surrender benefits, the
present value of any paid-up annuity benefit available as a
nonforfeiture option at any time prior to maturity shall not be less
than the greater of (1) the sum for each account other than an equity
index account of the actual accumulation amount as defined in paragraph
two of subsection (c) of this section plus the sum for each equity index
account of the value of the equity index account as defined in paragraph
four of subsection (c) of this section and (2) the present value of that
portion of the maturity value of the annuity benefit provided at
maturity under the contract arising from considerations paid prior to
the time the contract is surrendered in exchange for, or changed to, a
deferred paid-up annuity, such present value being calculated for the
period prior to the maturity date on the basis of the guaranteed
interest rate specified in the contract for determining the maturity
value of the annuity benefit provided at maturity, but not less than the
accumulation interest rate as defined in subsection (c) of this section,
and increased by any existing additional amounts and dividends credited
by the company to the contract. For contracts which do not provide any
death benefits prior to the commencement of any annuity payments, such
present values shall be calculated on the basis of such interest rate
and the mortality table specified in the contract for determining the
maturity value of the paid-up annuity benefit, increased by any
additional amounts and dividends credited by the company to the
contract.

(g) For the purpose of determining the benefits calculated under
subsections (e) and (f) of this section, in the case of annuity
contracts under which an election may be made to have annuity payments
commence at optional maturity dates, the maturity date shall be deemed
to be the latest date for which election shall be permitted by the
contract, but shall not be deemed to be later than the anniversary of
the contract next following the annuitant's seventieth birthday or the
tenth anniversary of the contract, whichever is later.

(h) If the contract fails at any time prior to the commencement of
annuity payments to provide cash surrender benefits or to provide death
benefits at least equal to the actual accumulation amount, it shall
contain a statement in a prominent place that such benefits are not
provided.

(i) Any paid-up annuity, cash surrender or death benefits available at
any time other than on the contract anniversary under any contract with
fixed scheduled considerations shall be calculated with allowance for
the lapse of time and the payment of any scheduled considerations beyond
the beginning of the contract year in which cessation of payment of
considerations under the contract occurs.

(j) For any contract which provides, within the same contract by rider
or supplemental contract provision, both annuity benefits and life
insurance benefits that are in excess of the greater of cash surrender
benefits or a return of the gross considerations with interest, the
minimum nonforfeiture benefits shall be equal to the sum of the minimum
nonforfeiture benefits for the annuity portion and the minimum
nonforfeiture benefits, if any, for the life insurance portion computed
as if each portion were a separate contract. Notwithstanding the
provisions of subsections (d), (e), (f), (g) and (i) of this section,
additional benefits payable in the event of total and permanent
disability, as reversionary annuity or deferred reversionary annuity
benefits, or as other policy benefits additional to life insurance,
endowment and annuity benefits, and considerations for all such
additional benefits, shall be disregarded in ascertaining the
accumulation amounts, and the paid-up annuity, cash surrender and death
benefits, that may be required by this section. The inclusion of such
additional benefits shall not be required in any paid-up benefits,
unless such additional benefits separately would require minimum paid-up
annuity, cash surrender or death benefits.

(k) (1) At least once in each contract year, the company shall mail to
each holder of a contract subject to this section under which benefit
payments have not yet commenced a statement as of a date during such
year as to any paid-up annuity benefit or the amount available under
each account to provide a paid-up annuity benefit, any cash surrender
benefit and any death benefit, under the contract. If the minimum annual
effective rate of interest is subject to redetermination, then the
statement shall include the current minimum annual effective rate of
interest and the next redetermination date. For contracts containing an
equity index account, the statement shall identify the minimum
accumulation value, the equity index value, any changes in the
participation rate, margin, cap, floor or other factor used in the
equity index formula. The statement shall be addressed to the last
post-office address of the contractholder known to the company.

(2) This subsection shall not apply to any contract providing for a
single consideration if the paid-up annuity benefits, any cash surrender
benefits and any death benefits under the contract are identical in
amount to those specified at issue.

(l) The operative date of this section shall be:

(1) as to a company which filed with the superintendent a written
notice of its election to comply with this section after a specified
date before January first, nineteen hundred eighty-one, such specified
date; and

(2) as to a company which made no such election, January first,
nineteen hundred eighty-one.