Life Bureau Filing Guidance Note

Guidance for Guaranteed Paid-up Deferred Annuities

Guidance Date: 03/13/2009

See also: Supplemental Guidance for Change in Annuitization Start Date under Guaranteed Paid-up Deferred Annuities.

  1. This guidance is applicable to guaranteed paid-up deferred annuity contracts subject to §4223 of the Insurance Law. For this guidance, a guaranteed paid-up deferred annuity is an annuity in which each contribution purchases guaranteed income determined at the time of contribution to commence at a stated date. Guaranteed paid-up deferred annuities do not credit additional amounts (excess interest) and are not expected to pay dividends.

    Subsection §4223(a) requires annuity contracts subject to §4223 to contain in substance the provisions of §4223 or corresponding provisions that in the opinion of the superintendent are at least as favorable to the contract holder. In addition, for any annuity contract subject to §4223, §44.6(a) of Regulation 127 requires the annuity contract to have cash surrender values available, unless the contract meets one of the listed exemptions. Pursuant to §44.6(a)(6) of Regulation 127, the superintendent may approve annuity contracts subject to §4223 without cash surrender benefits upon a demonstration that cash surrender benefits are not appropriate.

  2. Guaranteed paid-up deferred annuities may require approval under the authority granted to the superintendent in §4223(a) and §44.6(a)(6) of Regulation 127 for features such as:
    • Limited or no death benefit; for the purpose of this guidance death benefit excludes amounts payable as a result of the annuity form income option selected (e.g., certain payments);
    • No cash values;
    • No specification of interest rate or mortality table as specified in §4223(a)(1)(C);
    • A provision for annuity benefits other than as specified in §4223(a)(1)(E);
    • No explicit account value or actual accumulation amount as specified in §4223(c); or
    • No specification of an interest rate or mortality table as specified in §4223(d).
  3. The Circular Letter 6 (2004) process may not be used for contracts with such features when the superintendent must exercise discretion pursuant to §4223(a) or §44.6(a)(6). The submission letter for such contracts should indicate compliance with this guidance and may ask for priority consideration.
  4. A form submission requiring approval based on the authority granted to the superintendent under §4223(a) or §44.6(a)(6) should comply with the following items as applicable:
    1. The cover page of the contract contains a statement to the effect that the contract (or certificate) does not provide cash surrender benefits prior to the commencement of annuity payments. See §4223(h).
    2. The cover page of the contract contains a statement to the effect that the contract (or certificate) does not provide death benefits prior to the commencement of annuity payments. See §4223(h).
    3. For contracts with a death benefit and without an explicit accumulation amount, the cover page must describe how the death benefit is calculated.

    4. The contract must have provisions at least as favorable as the provisions required by §4223(a)(1)(C). Section 4223(a)(1)(C) requires a statement of the mortality table, if any, interest rate and sufficient information to determine the amounts and times of any minimum guaranteed paid-up, cash surrender or death benefits.

      For a single premium contract where the amount of benefits are fully defined in the contract, the inclusion of the mortality table, if any, and interest rate is not required because the Department considers the inclusion of the actual benefits to be at least as favorable as the ability to calculate the benefits.

      For Flexible Premium contracts the contract must provide:

      1. contact information for the contract holder to quickly obtain information on current purchase rates and the benefits purchased to date (e.g. a telephone number and web address); and
      2. a report no less frequently than annually which will state the amount of benefits purchased with the premiums received since the last report, including death benefits, the total amount of benefits purchased to date and the scheduled commencement date(s) of income benefits.

    5. The contract must have provisions as determined by the superintendent that are at least as favorable as the provisions required by §4223(a)(1)(E) and §4223(d).  For single premium contracts, the Department considers the use of competitive purchase rates based on current market conditions at the time of purchase for fully guaranteed benefits to be as least as favorable as the requirements of §4223(a)(1)(E) and §4223(d).

      For flexible premium contracts, the Department considers the following to be as least as  favorable as the requirements of §4223(a)(1)(E) and §4223(d):

      1. The contract must include purchase rates guaranteed for the life of the contract using a full table of purchase rate guarantees or by providing a mortality table, interest rate and any additional information from which the purchase rate guarantees can be derived; and
      2. The contract must provide that at the time of premium payment the amount of income benefits purchased will not be less than the greater of the amount that could be purchased by applying the premium payment to the purchase rate guarantees in the contract and the amount that could be purchased by applying the premium payment under any guaranteed paid-up deferred annuity contract offered by the company at the time to the same class of annuitants.
    6. The application and contract must describe any discretion retained by the insurer to limit the frequency or dollar amount of premium. A contract where the insurer retains the discretion to limit premium must provide a statement to the effect that the right to limit premium would not be exercised in an unfairly discriminatory manner.
    7. If the contract allows a change in the annuitization start date, annuity income option or annuitant, the contract must describe how such change will affect contract benefits and the contract must state any explicit charge for the change. The contract must include a description of the method and factors used to determine the income resulting from the change. The contract must provide that the contractholder can request replacement ratios to evaluate specific changes being considered. The replacement ratio is defined in item 9. The contract must also provide that the replacement ratio will be provided to the contract holder for any change made.
    8. If the contract has any commutation or surrender provision, the contract must provide a detailed description of such provision. The contract must include a description of the method and factors used to determine the commutation or surrender value. The contract must provide that the contractholder can request replacement ratios to help evaluate commutation or surrender values. The replacement ratio is defined in item 9.

    9. The replacement ratio is (a)/(b) where (a) and (b) are defined as follows:

      Present values are calculated on the basis of either (i) the current mortality and interest pricing assumptions that would be used to price a guaranteed paid-up deferred annuity with the same income payments and annuitant as the income payments and annuitant for which the present valued is being determined, or (ii) a current interest rate under a readily available public index and, if applicable, a mortality table provided that the index and mortality table with projection if applicable are reasonable and disclosed in the contract. If current pricing assumptions are used and not available, then the present value shall be calculated on the basis of the interest and mortality assumptions used to price any annuity for which the company is determining competitive rates and for which the mortality is available over the appropriate time frame.

      A contract subject to items 7 or 8 must describe the replacement ratio with words to the effect that, "The replacement ratio is the value of benefits after they are changed as a percent of their value before they were changed."

      1. The present value of benefits as applicable after the change; and

      2. The present value of benefits before the change.

        Present values are calculated on the basis of either (i) the current mortality and interest pricing assumptions that would be used to price a guaranteed paid-up deferred annuity with the same income payments and annuitant as the income payments and annuitant for which the present valued is being determined, or (ii) a current interest rate under a readily available public index and, if applicable, a mortality table provided that the index and mortality table with projection if applicable are reasonable and disclosed in the contract. If current pricing assumptions are used and not available, then the present value shall be calculated on the basis of the interest and mortality assumptions used to price any annuity for which the company is determining competitive rates and for which the mortality is available over the appropriate time frame.

        A contract subject to items 7 or 8 must describe the replacement ratio with words to the effect that, "The replacement ratio is the value of benefits after they are changed as a percent of their value before they were changed."

  5. The submission must be accompanied by an actuarial memorandum which is signed and dated and addresses the following, as applicable:
    1. A description of the benefits in the contract.
    2. A statement explaining why the annuity benefits purchased with each consideration will be at least as favorable as the annuity benefits required by §4223 including §4223(a)(1)(E) and §4223(d).
    3. If no cash surrender benefit or death benefit is provided, the actuarial memorandum must explain why the omission of such benefit or benefits is appropriate. See the requirements to omit cash values in §44.6(a)(6) of Regulation 127.
    4. If the contract has a commutation feature, surrender option, or allows a change in the income start date, annuity option, or annuitant, the actuarial memorandum must explain how such provisions are fair (provide reasonable values) and limit anti-selection risk.
  6. An application or a special disclosure document to be signed and dated by the applicant must provide statements, as applicable, to the effect that:
    • I understand the start date for income payments cannot be changed after issue;
    • I understand the restrictions in the changes to the start date for income payments;
    • I understand the annuity option cannot be changed after issue;
    • I understand the restrictions in the changes in the annuity option;
    • I understand the annuity has no death benefit;
    • I understand how the death benefit is calculated;
    • I understand the policy has no cash value, loan value or surrender value;
    • I understand the annuity income payments are guaranteed at purchase and will neither increase nor decrease in response to changes in interest rates or inflation. [If the income does increase / decrease by the terms of the contract then the increase or decrease should be stated as well as how such increase and decrease varies with interest rates or inflation].

Please note that this guidance is not meant to be all inclusive of the requirements for a guaranteed paid-up deferred annuity. Other concerns may be raised on a case by case basis during the review of the policy forms. In particular, this guidance does not address issues of premium default, nonforfeiture and risks for a product in which stipulated premiums determine a guaranteed paid-up benefit at issue.