NEW YORK STATE ASSEMBLY MEMORANDUM IN SUPPORT OF LEGISLATION submitted in accordance with Assembly Rule III, Sec 1(f)
BILL NUMBER: A7306B
SPONSOR: Cahill TITLE OF BILL: An act to amend the insurance law, in relation to life
insurance policies that credit additional amounts in accordance with an
equity index
PURPOSE: The purpose of the bill is to permit indexed universal life
insurance policies to credit additional amounts no less frequently than
every three years.
SUMMARY OF PROVISIONS: Amends N. 3203(a)(13)(A), 3203 (a)(14), 3203
(e) and 3209(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 than every three
years. This bill also contains several provisions that require insurers
to include Certain favorable policy features in the contract and also
requires customer disclosures regarding specific terms of the contract.
EXISTING LAW: Current law requires that all policies crediting addi-
tional amounts must credit such additional amounts no less frequently
than annually. This annual crediting requirement places severe limita-
tions 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 Depart-
ment 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 three 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 poli-
cies 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 life 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, howev-
er, 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 cred-
iting 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 with-
out risk of loss associated with market downturns.
LEGISLATIVE HISTORY: S.4039-A of 2011-12
FISCAL IMPLICATIONS: None to State.
EFFECTIVE DATE: Immediately.
