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Regulators To Consider Term Conversion Rules

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What should a financial services company say when it is replacing term life policies issued by one corporate affiliate with term life policies issued by another corporate affiliate?

Regulators on the Life Insurance and Annuities Committee at the National Association of Insurance Commissioners, Kansas City, Mo., plan to consider that question next week, at the NAIC’s spring meeting in Orlando, Fla.

Life insurers are asking the NAIC to ease the rules for intra-corporate family term conversions by changing the Life Insurance and Annuities Replacement model regulation.

The NAIC adopted the replacement model in 1997, in response to waves of replacements of life and annuity contracts that took place in the mid-1990s. Regulators wanted to establish guidelines to control the replacement process.

One section of the model provides that the model does not apply when “an application to the existing insurer that issued the existing policy or contract when a contractual change or a conversion privilege is being exercised; or, when the existing policy or contract is being replaced by the same insurer pursuant to a program filed with and approved by the commissioner.”

The proposal now under consideration at the NAIC would add a section stating that a term conversion would be exempt from the usual replacement rules “when a term conversion privilege is exercised among corporate affiliates.”

Backers of exempting sister company term conversions from the usual replacement rules include MetLife Inc., New York; New York Life Insurance Company, New York; and Prudential Financial Inc., Newark, N.J.

The proposed change also has the support of the American Council of Life Insurers, Washington, and the Life Insurers Council, Atlanta.

MetLife has argued that exempting affiliate term conversions would not hurt a consumer by creating new incontestability periods, new surrender charges or other new other new stipulations.

There would be no loss of cash value, because the conversion would be from a term contract to a whole life contract at the end of the term contract and at the discretion of the consumer, says Linda Lanam, an ACLI vice president.

A policyholder would have the option of converting or letting the insurance end, Lanam says.

Consumer advocates say insurers should give consumers proper disclosures about any policy replacements.

Today, 42 companies have 5 or more life insurance affiliates within their corporate structure, and that means the proposed replacement model change could affect a large number of companies and contract holders, according to Birny Birnbaum, executive director of the Center for Economic Justice, Austin, Texas.

If a company has many affiliates, at least 1 or 2 of those affiliates may have a different corporate strategy than the other affiliates, Birnbaum says.

Birnbaum also says he is concerned that the new replacement model wording could be applied to something other than a simple affiliate-to-affiliate term conversion.


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