SECs New Rules For VL Registrations Will Reform Prospectuses

The Securities and Exchange Commissions new rules for prospectuses that offer variable life insurance policies, which were adopted in April, are part of a new type of registration statement.

Insurers will be required to use this statement–Form N-6–to register VL policies as securities. Form N-6 must be used for new contracts or updates to VL insurance prospectuses filed with the SEC on or after Dec. 1, 2002.

This is the first time the SEC has adopted a registration statement format specifically tailored to VL insurance.

Prior to this, insurers had to use a general form with antiquated requirements that did not provide any guidance on disclosure for VL policies. That left the industry and the SEC staff to grope through disclosure requirements through the process of SEC staff review of filings.

Under current standards, VL insurance prospectuses are required to include so much information that they are veritable books. These books can be as long as 100 pages.

The new rules help shorten VL prospectuses in many ways. For instance:

Form N-4 provides for a two-part disclosure format, consistent with the rules for mutual funds and variable annuities. This format consists of a prospectus and an additional document called a “statement of additional information” (SAI). The prospectus need only include “essential information” that assists an investor in making an investment decision. More detailed discussions can now be relegated to the SAI. The prospectus must be delivered with the security (the VL policy), and the SAI must be made available upon request.

The insurers financial statements may be relegated to the SAI or parts of the registration statement other than the prospectus. (By contrast, current standards require such statements to be included in the prospectus.)

The financial statements of the segregated asset account that supports the VL policys assets may also be relegated to the SAI. (Again, under current rules, these must be included in the prospectus.)

Illustrations may be included at the discretion of the insurer in either the prospectus or the SAI. (Note: The SEC has traditionally required hypothetical illustrations in VL policy prospectuses for prototype insureds, but now illustrations are no longer required.)

Under the new rules, a “risk/benefit summary” will be required at the front of a VL insurance prospectus. This summary must include a plain-English description of contractual benefits and risks under a VL policy. Disclosure will be required that VL insurance contracts are unsuitable as short-term savings vehicles.

Another new requirement is a fee table at the front of the prospectus. This will be similar to the fee tables in prospectuses for mutual funds and VAs. The intention is to promote uniformity and comparison-shopping.

The fee table will require disclosure in tabular format of policyholder transaction fees, such as sales loans and surrender charges, annual charges, and underlying fund expenses. For underlying funds, the SEC will permit disclosure of a range of expenses in the VL prospectus, rather than a complete presentation of expenses for each underlying fund option.

The SEC also changed the rules for prospectuses for underlying funds–to require that they have a fee table. (Currently they do not require a fee table if the funds expenses are disclosed in the variable contract prospectus.)

While the theory of comparison-shopping for VL policies makes sense, the complexity of the products will present challenges in drafting fee tables for VL insurance prospectuses.

The SEC has required disclosure of fees and charges on riders, which do not always lend themselves to simple tabular presentation.

Further, the cost of insurance does not lend itself to a tabular presentation since it will vary based upon the age, risk classification and perhaps gender of the insured. This was the most controversial issue in the debates over Form N-6.

The SEC originally proposed that insurers disclose the range of minimum and maximum costs of insurance charges that could be imposed under a contract. But the commentators responded that such a range would be extremely broad and meaningless. However, at its open meeting on April 11, 2002, each of three SEC Commissioners opined that the range of COI charges would alert a prospective investor that he or she needs to get more information on this charge.

In the form, as adopted, the fee table will require disclosure of the range of charges, as well as the COI paid by a representative policyholder, coupled with narrative disclosure that the charges for the representative insured will likely differ from that paid by an investor. The table must also disclose that the cost of insurance varies with individual characteristics and that a policyholder can obtain more information about the costs that would apply to him or her.

One area that the new rules do not address is the standards for VL insurance advertising. Noting that advertising practices vary widely in the way charges and expenses are accounted for, some commentators asked the SEC to prescribe uniform standards for VL insurance performance advertising. The SEC declined to take this action.

Jeffrey S. Puretz is a partner with the Dechert law firm, resident in its Washington,D.C. office. He may be e-mailed at Jeffrey.puretz@dechert.com.


Reproduced from National Underwriter Life & Health/Financial Services Edition, April 29, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.