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Annuity Disclosures: Changes May Be Coming to a State Near You

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The current version of the NAIC’s Annuity Disclosure Model Regulation (Model 245), revised last year, has as its stated purpose to “specify the minimum information which must be disclosed, the method for disclosing it and the use and content of illustrations, if used, in connection with the sale of annuity contracts.” Reviewing some of the newly added requirements can provide some additional insight into possible changes that could impact insurers’ policies and procedures in the not so distant future.

In terms of the actual disclosure documents, some revisions have been made to the minimum informational requirements. For example, it’s no longer acceptable to limit basic insurer information on these types of document to its address. An insurer will now have to also include its legal name, physical address, website address and telephone number. Additionally, both the guaranteed and “non-guaranteed elements of the contract, and their limitations, if any, need to be provided along with an explanation of how these elements operate.

Newly specified disclosures for fixed indexed annuities include the elements used to determine the index-based interest, such as the participation rates, caps or spread, as well as an explanation of how the index-based interest is determined. The pre-existing requirement, which states the insurer must explain the initial crediting rate and specify any bonus or introductory portion, the duration of the rate and the fact that rates can change from time to time and are not guaranteed, is still present in Model 245.

The proper use of illustrations

  • While illustrations are not required, a new section has been added to the model, establishing standards in case an insurer decides to use an illustration. For states adopting these requirements, illustrations will not be allowed to:
  • Describe non-guaranteed elements in a manner that is misleading or has the capacity or tendency to mislead;
  • State or imply that the payment or amount of non-guaranteed elements is guaranteed; or
  • Be incomplete.

In addition to stating what an illustration cannot be, Model 245 mandates illustration conformity, including the following:

  • An illustration must be labeled with the date on which it was prepared;
  • Each page, including any explanatory notes or pages, must be numbered and show its relationship to the total number of pages in the disclosure document;
  • The assumed dates of premium receipt and benefit payout within a contract year shall be clearly identified;
  • If the age of the proposed insured is shown as a component of the tabular detail, it shall be issue age plus the numbers of years the contract is assumed to have been in force; and
  • The assumed premium on which the illustrated benefits and values are based shall be clearly identified, including rider premium for any benefits being illustrated.

The latest version of Model 245 also provides for multiple other required illustration elements, including specifics on the illustrated values, guaranteed death benefits and values available upon surrender and non-guaranteed elements, as well as fixed indexed annuities specifics. For review purposes, an annuity illustration example is included in Model 245’s Appendix A.

Insurers using an annuity illustration are also required to provide a narrative summary that includes the following, unless provided at the same time in a disclosure document:

  • A brief description of any contract features, riders or options, guaranteed and/or non-guaranteed, shown in the basic illustration and the impact they may have on the benefits and values of the contract;
  • A brief description of any other optional benefits or features that are selected, but not shown in the illustration, and the impact they have on the benefits and values of the contract;
  • Identification and a brief definition of column headings and key terms used in the illustration; and
  • Specific statements as detailed in the model.

Through the end of April 2012, Iowa was the only state to have adopted the current version. However, as states move forward in adopting the various changes, insurers may consider evaluating the actual disclosure requirements and the detailed requirements associated with the use of illustrations.

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