OGC Opinion No. 07-07-12
The Office of General Counsel issued the following opinion on July 19, 2007, representing the position of the New York State Insurance Department.
RE: Regulation 60 Replacement Inquiry
Questions Presented:
(1) If an annuitant surrenders or otherwise terminates an individual annuity contract before its maturity date, and as part of the transaction purchases a new individual life insurance policy, which is delivered or issued for delivery in New York State by an authorized insurer, is there a "replacement" as defined by § 51.2(a)(1) of N.Y. Comp. Codes R. & Regs. tit. 11, Part 51 (Regulation 60)?
(2) If an annuitant surrenders or otherwise terminates an individual annuity contract before its maturity date, and at a later time purchases a new individual life insurance policy, which is delivered or issued for delivery in New York State by an authorized insurer, is there a replacement as defined by § 51.2(a)(1) of Regulation 60?
Conclusions:
(1) Yes. This is a replacement as defined by § 51.2(a)(1) of Regulation 60, because the producer has knowledge that as part of the transaction, an existing individual annuity contract is being surrendered or otherwise terminated, and a new individual life insurance policy is being purchased, in a context where the new individual life insurance policy is delivered or issued for delivery in New York State by an authorized insurer.
(2) It depends on the facts. If the producer and the annuitant had a plan that a new individual life insurance policy would be purchased from the same producer at a later time after the annuity contract was surrendered or otherwise terminated, then there is a replacement within the meaning of § 51.2(a)(1) of Regulation 60.
Facts:
The inquirer reports that he is licensed by the Insurance Department as a life, accident and health agent, and that he has appropriate investment advisor license status. The inquirer also reports that he is a wholesale agent with an insurer, and that he trains its producers. The inquirer asks whether the provisions of Regulation 60 are implicated when an annuitant surrenders or otherwise terminates an individual annuity contract and then purchases a new individual life insurance policy, either as part of the same transaction or at a later time.
Analysis:
Section 51.2(a) of Regulation 60 is relevant to your inquiry. It states in pertinent part:
(a) The term replacement of a life insurance policy or an annuity contract as used in this Part means, except as exempted in section 51.3 of this Part, that new life insurance or new annuities are to be purchased and delivered or issued for delivery in New York and it is known to the department licensee that, as part of the transaction, existing life insurance policies or annuity contracts have been or are likely to be:
(1) lapsed, surrendered, partially surrendered, forfeited, assigned to the insurer replacing the life insurance policy or annuity contract, or otherwise terminated; . . . .
In the first situation that the inquirer presents, the new individual life insurance policy is delivered or issued for delivery in New York State by an authorized insurer. In addition, the existing individual annuity contract is surrendered or otherwise terminated as part of the transaction to purchase the new individual life insurance policy. Accordingly, in these circumstances, there is a replacement within the meaning of § 51.2(a)(1) of Regulation 60.1
The inquirer’s second question implicates pertinent provisions of §§ 51.5 and 51.6 of Regulation 60, which set forth the duties of producers and insurers, respectively, with respect to replacements. Section 51.5 of Regulation 60 requires that each agent and broker:
(a) obtain with or as part of each application a completed “Definition of Replacement” in a form prescribed by the Superintendent of Insurance and signed by the applicant and the agent or broker and leave a copy of such form with the applicant for his or her records;
(b) submit to the insurer along with each application a signed and completed “Definition of Replacement” . . . .
Section 51.6(a) of Regulation 60 states that “[e]ach insurer shall: . . .
(4) require with or as part of each application a statement signed by the agent or broker as to whether, to the best of his or her knowledge, replacement of a life insurance policy or annuity contract is involved in the transaction.
The Definition of Replacement contains a statement by the agent or broker that must be signed, and answered yes or no, that "TO THE BEST OF MY KNOWLEDGE, A REPLACEMENT IS INVOLVED IN THIS TRANSACTION".
In the second situation that the inquirer presents, the annuitant surrenders or otherwise terminates the annuity contract, and then at a later time purchases a new individual life insurance policy, which is delivered or issued for delivery in New York State by an authorized insurer. Whether the producer has knowledge that a replacement is involved in that circumstance depends on the facts. If there is evidence of communications between the annuitant and the producer about the advantages or disadvantages of an annuity contract as compared to a life insurance policy, and the new individual life insurance policy is purchased from the same producer who sold the annuity contract, then the replacement provisions of Regulation 60 apply.
For further information you may contact Senior Attorney Robert Freedman at the New York City Office.
1 If the existing individual annuity contract were partially surrendered so that over time a stream of income from the annuity contract would be used to purchase the new individual life insurance policy, that, too, would constitute a "replacement."