The New York State Insurance Department has drafted a circular letter that could change the way the state treats annuity death benefits.

Department officials describe the proposed death benefit bonus recapture change in a draft circular letter posted on the department website.

The circular letter would affect sellers of fixed annuities, or contracts that combine fixed and variable benefits, that offer death benefits and also offer bonuses.

In some cases, annuity holders die before they can begin collecting annuity income payments.

Before 2002, April 30, 2002, the death benefit had to be equal to or greater than the actual accumulation amount, officials write in the draft letter.

Since April 30, 2002, the New York department “permitted insurers to recapture bonus interest rates or credits from a death benefit … when death occurred within the 12 months immediately following the bonus credit,” officials write.

Before of a law that took effect in 2008, insurers now may not recapture any bonus interest rates or credits from death benefit proceeds, officials write.

“Insurers may not reduce the amount of the death benefit–including by any bonus interest rate or credit attributed to the annuity contract or certificate–if death occurs before annuity payments commence,” officials write.

The effective date of the change was Oct. 5, 2008.

“Any contract or certificate issued on or after that date shall be enforceable as if it conformed to the law,” officials write.

Insurers should endorse existing fixed annuity contracts issued on or after Oct. 5, 2008, to remove any death benefit bonus recapture provisions, or in the case of a fixed and variable annuity contract, endorse the contracts to make it clear that the recapture will not be applied to the fixed account portion, officials write.

“For new issues of annuity contracts and certificates, insurers may use endorsements or may submit new policy forms that include the revisions,” officials write.