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H.B. 201

             1     

LIFE INSURANCE AND ANNUITIES LAW

             2     
AMENDMENTS

             3     
2005 GENERAL SESSION

             4     
STATE OF UTAH

             5     
Sponsor: James A. Dunnigan

             6     
             7      LONG TITLE
             8      General Description:
             9          This bill modifies Insurance Code provisions dealing with life insurance and annuities.
             10      Highlighted Provisions:
             11          This bill:
             12          .    defines a two-tier annuity;
             13          .    exempts two-tier annuities from certain cash surrender value requirements;
             14          .    makes permissive a requirement that the commissioner make rules to establish
             15      standards for materials used in the solicitation or sale of life insurance;
             16          .    requires each life insurance policy or annuity contract to contain a description on its
             17      cover page and explains what must be included in the description;
             18          .    requires insurers to maintain records that affect the legal effect of a life insurance
             19      policy, annuity contract, or certificate of life insurance, for the policy term plus five
             20      years;
             21          .    creates and defines an employer group category and exempts the groups' life
             22      insurance policies from certain requirements;
             23          .    exempts credit union groups and creditor groups that insure debtors from
             24      requirements that they notify their members of conversion rights and information;
             25      and
             26          .    makes technical changes.
             27      Monies Appropriated in this Bill:


             28          None
             29      Other Special Clauses:
             30          None
             31      Utah Code Sections Affected:
             32      AMENDS:
             33          31A-22-409, as last amended by Chapter 97, Laws of Utah 2004
             34          31A-22-425, as enacted by Chapter 96, Laws of Utah 2004
             35          31A-22-501, as last amended by Chapter 96, Laws of Utah 2004
             36          31A-22-506, as enacted by Chapter 242, Laws of Utah 1985
             37          31A-22-507, as enacted by Chapter 242, Laws of Utah 1985
             38      ENACTS:
             39          31A-22-426, Utah Code Annotated 1953
             40          31A-22-427, Utah Code Annotated 1953
             41          31A-22-501.1, Utah Code Annotated 1953
             42     
             43      Be it enacted by the Legislature of the state of Utah:
             44          Section 1. Section 31A-22-409 is amended to read:
             45           31A-22-409. Standard Nonforfeiture Law for Individual Deferred Annuities.
             46          (1) This section is known as the "Standard Nonforfeiture Law for Individual Deferred
             47      Annuities."
             48          (2) This section does not apply to:
             49          (a) any reinsurance;
             50          (b) a group annuity purchased under a retirement plan or plan of deferred
             51      compensation:
             52          (i) established or maintained by:
             53          (A) an employer, including a partnership or sole proprietorship;
             54          (B) an employee organization; or
             55          (C) both an employer and an employee organization; and
             56          (ii) other than a plan providing individual retirement accounts or individual retirement
             57      annuities under Section 408, Internal Revenue Code;
             58          (c) a premium deposit fund;


             59          (d) a variable annuity;
             60          (e) an investment annuity;
             61          (f) an immediate annuity;
             62          (g) a deferred annuity contract after annuity payments have commenced;
             63          (h) a reversionary annuity; or
             64          (i) any contract that shall be delivered outside this state through an agent or other
             65      representative of the company issuing the contract.
             66          (3) (a) If a policy is issued after this section takes effect as set forth in Subsection (15),
             67      a contract of annuity, except as stated in Subsection (2), may not be delivered or issued for
             68      delivery in this state unless the contract of annuity contains in substance:
             69          (i) the provisions described in Subsection (3)(b); or
             70          (ii) provisions corresponding to the provisions described in Subsection (3)(b) that in
             71      the opinion of the commissioner are at least as favorable to the contractholder, governing
             72      cessation of payment of consideration under the contract.
             73          (b) Subsection (3)(a)(i) requires the following provisions:
             74          (i) the company shall grant a paid-up annuity benefit on a plan stipulated in the contract
             75      of such a value as specified in Subsections (7), (8), (9), (10), and (12):
             76          (A) upon cessation of payment of consideration under a contract; or
             77          (B) upon a written request of the contract owner;
             78          (ii) if a contract provides for a lump-sum settlement at maturity, or at any other time,
             79      upon surrender of the contract at or before the commencement of any annuity payments, the
             80      company shall pay in lieu of any paid-up annuity benefit a cash surrender benefit of such
             81      amount as is specified in Subsections (7), (8), (10), and (12);
             82          (iii) a statement of the mortality table, if any, and interest rates used in calculating any
             83      of the following that are guaranteed under the contract:
             84          (A) minimum paid-up annuity benefits;
             85          (B) cash surrender benefits; or
             86          (C) death benefits;
             87          (iv) sufficient information to determine the amounts of the benefits described in
             88      Subsection (3)(b)(iii);
             89          (v) a statement that any paid-up annuity, cash surrender, or death benefits that may be


             90      available under the contract are not less than the minimum benefits required by any statute of
             91      the state in which the contract is delivered; and
             92          (vi) an explanation of the manner in which the benefits described in Subsection
             93      (3)(b)(v) are altered by the existence of any:
             94          (A) additional amounts credited by the company to the contract;
             95          (B) indebtedness to the company on the contract; or
             96          (C) prior withdrawals from or partial surrender of the contract.
             97          (c) Notwithstanding the requirements of this Subsection (3), any deferred annuity
             98      contract may provide that if no consideration has been received under a contract for a period of
             99      two full years and the portion of the paid-up annuity benefit at maturity on the plan stipulated
             100      in the contract arising from consideration paid before the period would be less than $20
             101      monthly:
             102          (i) the company may at the company's option terminate the contract by payment in cash
             103      of the then present value of such portion of the paid-up annuity benefit, calculated on the basis
             104      of the mortality table specified in the contract, if any, and the interest rate specified in the
             105      contract for determining the paid-up annuity benefit; and
             106          (ii) the payment described in Subsection (3)(c)(i), relieves the company of any further
             107      obligation under the contract.
             108          (d) A company may reserve the right to defer the payment of cash surrender benefit for
             109      a period not to exceed six months after demand for the payment of the cash surrender benefit
             110      with surrender of the contract.
             111          (4) For a policy issued before June 1, 2006, the minimum values as specified in
             112      Subsections (7), (8), (9), (10), and (12) of any paid-up annuity, cash surrender, or death benefits
             113      available under an annuity contract shall be based upon minimum nonforfeiture amounts as
             114      established in this Subsection (4).
             115          (a) (i) With respect to contracts providing for flexible considerations, the minimum
             116      nonforfeiture amount at any time at or before the commencement of any annuity payments shall
             117      be equal to an accumulation up to such time, at a rate of interest of 3% per annum of
             118      percentages of the net considerations paid prior to such time:
             119          (A) decreased by the sum of:
             120          (I) any prior withdrawals from or partial surrenders of the contract accumulated at a


             121      rate of interest of 3% per annum; and
             122          (II) the amount of any indebtedness to the company on the contract, including interest
             123      due and accrued; and
             124          (B) increased by any existing additional amounts credited by the company to the
             125      contract.
             126          (ii) For purposes of this Subsection (4)(a), the net consideration for a given contract
             127      year used to define the minimum nonforfeiture amount shall be:
             128          (A) an amount not less than zero; and
             129          (B) equal to the corresponding gross considerations credited to the contract during that
             130      contract year less:
             131          (I) an annual contract charge of $30; and
             132          (II) a collection charge of $1.25 per consideration credited to the contract during that
             133      contract year.
             134          (iii) The percentages of net considerations shall be:
             135          (A) 65% of the net consideration for the first contract year; and
             136          (B) 87-1/2% of the net considerations for the second and later contract years.
             137          (iv) Notwithstanding Subsection (4)(a)(iii), the percentage shall be 65% of the portion
             138      of the total net consideration for any renewal contract year that exceeds by not more than two
             139      times the sum of those portions of the net considerations in all prior contract years for which
             140      the percentage was 65%.
             141          (b) (i) Except as provided in Subsections (4)(b)(ii) and (iii), with respect to contracts
             142      providing for fixed scheduled consideration, minimum nonforfeiture amounts shall be:
             143          (A) calculated on the assumption that considerations are paid annually in advance; and
             144          (B) defined as for contracts with flexible considerations that are paid annually.
             145          (ii) The portion of the net consideration for the first contract year to be accumulated
             146      shall be equal to an amount that is the sum of:
             147          (A) 65% of the net consideration for the first contract year; and
             148          (B) 22-1/2% of the excess of the net consideration for the first contract year over the
             149      lesser of the net considerations for:
             150          (I) the second contract year; and
             151          (II) the third contract year.


             152          (iii) The annual contract charge shall be the lesser of $30 or 10% of the gross annual
             153      consideration.
             154          (c) With respect to contracts providing for a single consideration payment, minimum
             155      nonforfeiture amounts shall be defined as for contracts with flexible considerations except that:
             156          (i) the percentage of net consideration used to determine the minimum nonforfeiture
             157      amount shall be equal to 90%; and
             158          (ii) the net consideration shall be the gross consideration less a contract charge of $75.
             159          (5) For a policy issued on or after June 1, 2006, the minimum values as specified in
             160      Subsections (7), (8), (9), (10), and (12) of any paid-up annuity, cash surrender, or death benefits
             161      available under an annuity contract shall be based upon minimum nonforfeiture amounts as
             162      established in this Subsection (5).
             163          (a) The minimum nonforfeiture amount at any time at or before the commencement of
             164      any annuity payments shall be equal to an accumulation up to such time, at rates of interest as
             165      indicated in Subsection (5)(b), of 87-1/2% of the gross considerations paid before such time
             166      decreased by the sum of:
             167          (i) any prior withdrawals from or partial surrenders of the contract accumulated at rates
             168      of interest as indicated in Subsection (5)(b);
             169          (ii) an annual contract charge of $50, accumulated at rates of interest as indicated in
             170      Subsection (5)(b);
             171          (iii) any premium tax paid by the company for the contract, accumulated at rates of
             172      interest as indicated in Subsection (5)(b); and
             173          (iv) the amount of any indebtedness to the company on the contract, including interest
             174      due and accrued.
             175          (b) (i) The interest rate used in determining minimum nonforfeiture amounts shall be
             176      an annual rate of interest determined as the lesser of:
             177          (A) 3% per annum; and
             178          (B) the five-year Constant Maturity Treasury Rate reported by the Federal Reserve,
             179      rounded to the nearest 1/20th of 1%, as of a date or average over a period no longer than 15
             180      months prior to the contract issue date or redetermination date under Subsection (5)(b)(iii):
             181          (I) reduced by 125 basis points; and
             182          (II) where the resulting interest rate is not less than 1%.


             183          (ii) The interest rate shall apply for an initial period and may be redetermined for
             184      additional periods.
             185          (iii) (A) If the interest rate will be reset, the contract shall state:
             186          (I) the initial period;
             187          (II) the redetermination date;
             188          (III) the redetermination basis; and
             189          (IV) the redetermination period.
             190          (B) The basis is the date or average over a specified period that produces the value of
             191      the five-year Constant Maturity Treasury Rate to be used at each redetermination date.
             192          (c) (i) During the period or term that a contract provides substantive participation in an
             193      equity indexed benefit, the reduction described in Subsection (5)(b)(i)(B)(I) may be increased
             194      by up to an additional 100 basis points to reflect the value of the equity index benefit.
             195          (ii) The present value of the additional reduction at the contract issue date and at each
             196      redetermination date may not exceed the market value of the benefit.
             197          (iii) (A) The commissioner may require a demonstration that the present value of the
             198      additional reduction does not exceed the market value of the benefit.
             199          (B) If the demonstration required under Subsection (5)(c)(iii)(A) is not made to the
             200      satisfaction of the commissioner, the commissioner may disallow or limit the additional
             201      reduction.
             202          (6) Notwithstanding Subsection (4), for a policy issued on or after June 1, 2004 and
             203      before June 1, 2006, at the election of a company, on a contract form-by-contract form basis,
             204      the minimum values as specified in Subsections (7), (8), (9), (10), and (12) of any paid-up
             205      annuity, cash surrender, or death benefits available under an annuity contract may be based
             206      upon minimum nonforfeiture amounts as established in Subsection (5).
             207          (7) (a) Any paid-up annuity benefit available under a contract shall be such that the
             208      contract's present value on the date annuity payments are to commence is at least equal to the
             209      minimum nonforfeiture amount on that date.
             210          (b) The present value described in Subsection (7)(a) shall be computed using the
             211      mortality table, if any, and the interest rate specified in the contract for determining the
             212      minimum paid-up annuity benefits guaranteed in the contract.
             213          (8) (a) For contracts that provide cash surrender benefits, the cash surrender benefits


             214      available before maturity may not be less than the present value as of the date of surrender of
             215      that portion of the cash surrender value that would be provided under the contract at maturity
             216      arising from considerations paid before the time of cash surrender:
             217          (i) decreased by the amount appropriate to reflect any prior withdrawals from or partial
             218      surrender of the contract;
             219          (ii) decreased by the amount of any indebtedness to the company on the contract,
             220      including interest due and accrued; and
             221          (iii) increased by any existing additional amounts credited by the company to the
             222      contract.
             223          (b) For purposes of this Subsection (8), the present value being calculated on the basis
             224      of an interest rate not more than 1% higher than the interest rate specified in the contract for
             225      accumulating the net considerations to determine the maturity value.
             226          (c) In no event shall any cash surrender benefit be less than the minimum nonforfeiture
             227      amount at that time.
             228          (d) The death benefit under a contract described in Subsection (8)(a) shall be at least
             229      equal to the cash surrender benefit.
             230          (9) (a) For contracts that do not provide cash surrender benefits, the present value of
             231      any paid-up annuity benefit available as a nonforfeiture option at any time prior to maturity
             232      may not be less than the present value of that portion of the maturity value of the paid-up
             233      annuity benefit provided under the contract arising from considerations paid before the time the
             234      contract is surrendered in exchange for, or changed to, a deferred paid-up annuity increased by
             235      any existing additional amounts credited by the company to the contract.
             236          (b) For purposes of this Subsection (9), the present value being calculated for the
             237      period prior to the maturity date on the basis of the interest rate specified in the contract for
             238      accumulating the net considerations to determine maturity value.
             239          (c) For contracts that do not provide any death benefits before commencement of any
             240      annuity payments, the present values shall be calculated on the basis of the interest rate and the
             241      mortality table specified in the contract for determining the maturity value of the paid-up
             242      annuity benefit.
             243          (d) In no event shall the present value of a paid-up annuity benefit be less than the
             244      minimum nonforfeiture amount at that time.


             245          (10) (a) For the purpose of determining the benefits calculated under Subsections (8)
             246      and (9), the maturity date shall be considered to be the latest date permitted by the contract,
             247      except that it may not be considered to be later than the later of:
             248          (i) the anniversary of the contract next following the annuitant's 70th birthday; or
             249          (ii) the tenth anniversary of the contract.
             250          (b) For a contract, other than a two-tier annuity as defined in Subsection (10)(d), that
             251      provides cash surrender benefits [on or past the maturity date], the cash surrender value on or
             252      past the maturity date shall be equal to the amount used to determine the annuity benefit
             253      payments.
             254          (c) A surrender charge may not be imposed on or past maturity.
             255          (d) As used in this Subsection (10), "two-tier annuity" means an annuity contract under
             256      which:
             257          (i) cash surrender value is an accumulation, at interest, of percentages of premiums
             258      specified in the contract; and
             259          (ii) cash surrender value cannot be derived from the amount used to determine the
             260      annuity benefit payments.
             261          (11) Any contract that does not provide cash surrender benefits or does not provide
             262      death benefits at least equal to the minimum nonforfeiture amount before the commencement
             263      of any annuity payments shall include a statement in a prominent place in the contract that
             264      these benefits are not provided.
             265          (12) Any paid-up annuity, cash surrender, or death benefits available at any time, other
             266      than on the contract anniversary under any contract with fixed scheduled considerations, shall
             267      be calculated with allowance for the lapse of time and the payment of any scheduled
             268      considerations beyond the beginning of the contract year in which cessation of payment of
             269      considerations under the contract occurs.
             270          (13) (a) For any contract that provides, within the same contract by rider or
             271      supplemental contract provisions, both annuity benefits and life insurance benefits that are in
             272      excess of the greater of cash surrender benefits or a return of the gross considerations with
             273      interest, the minimum nonforfeiture benefits shall:
             274          (i) be equal to the sum of:
             275          (A) the minimum nonforfeiture benefits for the annuity portion; and


             276          (B) the minimum nonforfeiture benefits, if any, for the life insurance portion; and
             277          (ii) computed as if each portion were a separate contract.
             278          (b) (i) Notwithstanding Subsections (7), (8), (9), (10), and (12), additional benefits
             279      payable, as described in Subsection (13)(b)(ii), and consideration for the additional benefits
             280      payable, shall be disregarded in ascertaining, if required by this section:
             281          (A) the minimum nonforfeiture amounts;
             282          (B) paid-up annuity;
             283          (C) cash surrender; and
             284          (D) death benefits.
             285          (ii) For purposes of this Subsection (13), an additional benefit is a benefit payable:
             286          (A) in the event of total and permanent disability;
             287          (B) as reversionary annuity or deferred reversionary annuity benefits; or
             288          (C) as other policy benefits additional to life insurance, endowment, and annuity
             289      benefits.
             290          (iii) The inclusion of the additional benefits described in this Subsection (13) may not
             291      be required in any paid-up benefits, unless the additional benefits separately would require:
             292          (A) minimum nonforfeiture amounts;
             293          (B) paid-up annuity;
             294          (C) cash surrender; and
             295          (D) death benefits.
             296          (14) In accordance with Title 63, Chapter 46a, Utah Administrative Rulemaking Act,
             297      the commissioner may adopt rules necessary to implement this section, including:
             298          (a) ensuring that any additional reduction under Subsection (5)(c) is consistent with the
             299      requirements imposed by Subsection (5)(c); and
             300          (b) providing for adjustments in addition to the adjustments allowed under Subsection
             301      (5)(c) to the calculation of minimum nonforfeiture amounts for:
             302          (i) contracts that provide substantive participation in an equity index benefit; and
             303          (ii) other contracts for which the commissioner determines adjustments are justified.
             304          (15) (a) After this section takes effect, any company may file with the commissioner a
             305      written notice of its election to comply with this section after a specified date before July 1,
             306      1988.


             307          (b) This section applies to annuity contracts of a company issued on or after the date
             308      the company specifies in the notice.
             309          (c) If a company makes no election under Subsection (15)(a), the operative date of this
             310      section for such company is July 1, 1988.
             311          Section 2. Section 31A-22-425 is amended to read:
             312           31A-22-425. Rulemaking authority.
             313          In accordance with Title 63, Chapter 46a, Utah Administrative Rulemaking Act, the
             314      commissioner [shall] may make rules to establish standards for any of the following used in
             315      connection with the solicitation or sale of life insurance policies and contracts:
             316          (1) a buyer's guide;
             317          (2) a disclosure;
             318          (3) an illustration;
             319          (4) a policy summary; or
             320          (5) a recommendation.
             321          Section 3. Section 31A-22-426 is enacted to read:
             322          31A-22-426. Coverage description.
             323          (1) Each life insurance policy, annuity contract, and certificate of life insurance shall
             324      contain a brief description printed on the cover page.
             325          (2) The description shall include:
             326          (a) the type of insurance;
             327          (b) whether it is participating or nonparticipating;
             328          (c) a significant limitation stated or included in the filed policy, contract, or certificate;
             329      and
             330          (d) a significant specific feature stated or included in the filed policy, contract, or
             331      certificate.
             332          Section 4. Section 31A-22-427 is enacted to read:
             333          31A-22-427. Life insurance and annuity policy records.
             334          A life insurer, and its successors, shall maintain all records that affect the legal effect of
             335      a life insurance policy, annuity contract, or certificate of life insurance for the term of the
             336      insurance plus five years.
             337          Section 5. Section 31A-22-501 is amended to read:


             338           31A-22-501. Eligible groups.
             339          A group or blanket policy of life insurance may not be delivered in Utah unless the
             340      insured group:
             341          (1) falls within at least one of the classifications under Sections [ 31A-22-502 ]
             342      31A-22-501.1 through 31A-22-509 ; and
             343          (2) is formed for a reason other than the purchase of insurance.
             344          Section 6. Section 31A-22-501.1 is enacted to read:
             345          31A-22-501.1. Employer groups.
             346          (1) The lives of a group of individuals may be insured under a policy:
             347          (a) issued as a policyholder, to:
             348          (i) an employer; or
             349          (ii) an employer sponsored trust for the benefit of the employer's employees;
             350          (b) having an insurable interest as stated in Subsection 31A-21-104 (2)(a)(v); and
             351          (c) subject to the requirement of Subsection 31A-21-104 (9).
             352          (2) A policy issued under this section is not subject to:
             353          (a) Section 31A-21-311 ; and
             354          (b) Sections 31A-22-516 through 31A-22-522 .
             355          Section 7. Section 31A-22-506 is amended to read:
             356           31A-22-506. Creditor groups to insure debtors.
             357          [A] (1) To insure debtors of a creditor, a group life insurance policy may be issued to a
             358      policyholder who is [a] any of the following:
             359          (a) the creditor [or];
             360          (b) the creditor's parent holding company; or [to]
             361          (c) trustees or agents designated by two or more creditors[, to insure debtors of the
             362      creditors. The policies are].
             363          (2) A policy described in Subsection (1) is subject to the [following] requirements[:] of
             364      this Subsection (2).
             365          [(1)] (a) (i) The persons eligible for insurance are:
             366          (A) all of the debtors of the creditors; or
             367          (B) all of any classes of debtors.
             368          (ii) The policy may provide that "debtors" includes:


             369          [(a)] (A) borrowers of money, or purchasers or lessees of goods, services, property,
             370      rights, or privileges for which payment is arranged through a credit transaction; and
             371          [(b)] (B) the debtors of one or more affiliated corporations, proprietorships, or
             372      partnerships under common control with the policyholder.
             373          [(2)] (b) (i) The premiums shall be paid by the policyholder, from:
             374          (A) the creditor's funds[, from];
             375          (B) charges collected from the insured debtors[,]; or
             376          (C) from both Subsections (2)(b)(i)(A) and (B).
             377          (ii) Except as provided under Section 31A-22-512 , a policy on which no part of the
             378      premium is contributed by insured debtors specifically for their insurance shall insure all
             379      eligible debtors.
             380          [(3)] (c) (i) To the extent of the creditor's interest, the insurance may be payable to the
             381      creditor or to any successor to the right, title, and interest of the creditor.
             382          (ii) The payment shall reduce or extinguish the obligation of the debtor to the extent of
             383      the payment.
             384          (iii) When the amount of insurance exceeds the debt, the excess is payable to a
             385      beneficiary other than the creditor named by the debtor, or to the debtor's estate.
             386          [(4)] (d) Group policies issued under this section are not subject to Sections
             387      31A-22-516 through [ 31A-22-520 ] 31A-22-521 .
             388          Section 8. Section 31A-22-507 is amended to read:
             389           31A-22-507. Credit union groups.
             390          (1) The lives of a group of individuals may be insured under a policy issued to a
             391      policyholder who is:
             392          (a) a credit union [or to]; or
             393          (b) trustees or agents designated by two or more credit unions. [This]
             394          (2) A policy described in Subsection (1) shall insure members of [the] a credit [unions]
             395      union for the benefit of persons other than:
             396          (a) the credit [unions,] union;
             397          (b) trustees[, or] of the credit union;
             398          (c) agents [or any of their officials.] of the credit union; or
             399          (d) an official of an entity described in Subsections (2)(a) through (c).


             400          (3) The policies are subject to the [following] requirements[:] of this Subsection (3).
             401          [(1)] (a) The persons eligible for insurance are:
             402          (i) all of the members of the credit [unions,] union; or
             403          (ii) all of any classes of [it.] the members of the credit union.
             404          [(2)] (b) The premiums shall be paid by the policyholder. Except as provided in
             405      Section 31A-22-512 , a policy on which no part of the premium is collected from the covered
             406      members specifically for their insurance shall insure all eligible members.
             407          [(3) Group policies] (c) A group policy issued under this section [are] is not subject to
             408      Sections 31A-22-517 through [ 31A-22-520 ] 31A-22-521 .




Legislative Review Note
    as of 1-7-05 9:24 AM


Based on a limited legal review, this legislation has not been determined to have a high
probability of being held unconstitutional.

Office of Legislative Research and General Counsel


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