Life insurance: additional first year premium (deposit term) policies

Issued and entered September 17, 1979 by Richard A. Hemmings, Commissioner of Insurance

Based on the oral testimony and written statements received at the public hearing on additional first year premium life insurance policies (commonly and mistakenly described as "deposit term" policies), held at the offices of the Michigan Insurance Bureau on May 18, 1978, and on research done by the Bureau staff, the Commissioner of Insurance (Commissioner) has determined that it is necessary to establish nonforfeiture, policy form, and marketing guidelines for the approval and sale of these and similar insurance policies in Michigan.

The primary issue that emerged from the public hearing, other than the debate over the merits of term insurance versus permanent insurance, was the apparent need to establish form and marketing guidelines that will provide for proper disclosure of the nature of additional first year premium policies to the insurance buyer. This is needed so that the buyer can make an informed decision when considering the purchase of this product. The guidelines will help ensure that additional first year premium policies and the marketing of those policies are in compliance with the Michigan Insurance Code of 1956, as amended, MCLA 500.100 et seq; MSA 24.1100 et seq.

DEFINITIONS

As used in these guidelines:

1. "Collateral term policy" means a policy which requires an insured to provide collateral as security instead of paying an initial, additional premium. In the event the policy lapses or is surrendered during its term, the collateral may be used to pay what is, in effect, an additional premium because of the lapse or surrender.

2. "Additional first year premium policy" means any term, modified term, modified life, or other life policy which provides that an additional first year premium will be paid in order that certain values and options will be available at the end of the initial term period, which premium is forfeited in whole or in part if the policy terminates for any reason, other than death, in its early years.

STANDARD NONFORFEITURE GUIDELINES

The Bureau staff shall use the following guidelines in applying the standard nonforfeiture law contained in Section 4060 of the Code, MCLA 500.4060; MSA 24.14060, to additional first year premium policies and similar policies:

1. For additional first year premium policies:

a. Values required during the initial and any renewal term period shall be determined by treating the policy as term insurance plus a pure endowment for the cash value or cash payment provided at the end of the term period and applying the standard nonforfeiture law.

b. If the policy contains an option or provision by which premiums continue for decreasing term coverage, the usual tests of values for such a policy apply.

2. For additional first year premium policies which convert to or become whole life policies:

a. Values required during the initial term period shall be determined by treating the policy as term insurance plus a pure endowment for the cash value provided at the end of the term period, and applying the standard nonforfeiture law.

b. Values required after the initial term period are determined by treating the entire policy as modified whole life and applying the standard nonforfeiture law.

3. For other high first year premium policies, the procedures used for determining minimum nonforfeiture values shall be consistent with the preceding guidelines and the standard nonforfeiture law.

POLICY FORM GUIDELINES

The Bureau staff shall follow the following guidelines in the approval and disapproval of additional first year premium policies and similar insurance policies:

1. Additional first year premium policies that provide term insurance for an initial term period and then automatically convert to whole life shall provide a disclosure in the title that the coverage automatically converts to whole life at the end of the term period.

2. The policy schedule shall contain a table showing the annual cash values during the initial term of the policy and the additional first year premium. (See attached Sample Schedule-Exhibit I).

3. Approval of collateral term policies shall be withdrawn, and any future filings shall be disapproved, on the basis that they violate Sections 2226(1) and (2), 2236(3), 4004, and 4010 of the Code, MCLA 500.2226(1) and (2); MSA 24.12226(1) and (2), MCLA 500.2236(3); MSA 24.12236(3), MCLA 500.4004; MSA 24.14004, MCLA 500.4010; MSA 24.14010. To facilitate Bureau staff review and action, companies having collateral term policies, either approved or pending, are requested to send the Bureau a letter withdrawing the forms from use in Michigan.

MARKETING GUIDELINES

In order to determine compliance with Sections 2005, 2007, and 4036 of the Code, MCLA 500.2005; MSA 24.12005, MCLA 500.2007; MSA 24.12007,
MCLA 500.4036; MSA 24.14036, the following are guidelines for advertising, sales materials, and sales presentations used or to be used with additional first year premium policies and similar insurance policies.

1. Advertisements, sales materials, and sales presentations of an additional first year premium policy which fail to fully and fairly inform an applicant or prospective insured as to future premium changes, benefits, and related options misrepresent the terms, benefits, advantages, or conditions of the policy.

2. The use of any term in the name given an additional first year premium policy that implies a deposit or any similar term associated with fund accumulations and investment contracts misrepresents the terms, benefits, advantages, or conditions of the policy.

3. The use of the term "deposit" to describe the additional first year premium and its use in reference to the cash value misrepresents the terms, benefits, advantages, or conditions of the policy.

4. The use of any statement or illustration in any advertisement, sales material, or sales presentation which makes reference to such terms as "deposit," "accumulation," "interest at x%," and all similar terms associated with fund accumulations and investment contracts where life contingencies are involved misrepresents the terms, benefits, advantages, or conditions of the policy.

5. Any statement or illustration showing a comparison between the endowment value or any specific cash value and the excess of the first year's premium over the renewal premium which implies that such endowment or cash value arises solely from such excess misrepresents the terms, benefits, advantages, or conditions of the policy.

6. The use of percentage figures to represent the relationship of the cash values to the additional first year premium misrepresents the terms, benefits, advantages, or conditions of the policy. A phrase such as "earn 8% per year interest on your additional premium" is an example of such misrepresentation.

7. The use of such terms as "Investment," "Profit," "Tax Free," "Return," "Double Your Money," and terms of similar import to describe the insurance policy, additional first year premium, or any portion of the insurance purchase misrepresents the terms, benefits, advantages, or conditions of the policy.

8. Information shall be included that explains what happens to the additional first year premium if the policy is terminated prior to the end of the term period.

9. The premium for the insurance and the additional first year premium shall be shown separately and properly identified.

10. Information about related or companion sales of annuity contracts or mutual funds shall be shown separately from additional first year premium policy information in marketing materials where the contracts, funds, and insurance are not part of the same contract.

11. In replacement situations, the required replacement disclosure statement shall be completed in conformity with the rules governing replacement of life insurance policies, Administrative Code 1954, R 500.601 et seq. In those rules, replacement of life insurance is deemed to include several specified transactions, including any transaction in which life insurance is to be purchased and, as part of the transaction, existing life insurance has been or is to be subjected to substantial borrowing of loan values whether in a single loan or under a schedule of borrowing over a period of time. Substantial borrowing occurs if an amount in excess of 50% of the tabular cash value is borrowed on one or more existing policies.

RIGHTS AND PROCEDURES

The guidelines in this bulletin shall become effective October 1, 1979. In conformity with Section 3(6) of the Administrative Procedures Act of 1969, MCLA 24.203(6); MSA 3.560(103)(6), these guidelines are a statement of policy which the agency intends to follow, which does not have the force or effect of law, and which binds the agency, but does not bind any other person.

The Bureau staff shall use these guidelines in reviewing all filings of additional first year premium life insurance policies and similar life insurance policies. Any policy filing which fails to meet the requirements of the Code shall be disapproved pursuant to Section 2236 of the Code, MCLA 500.2236; MSA 24.12236. The operation of this bulletin does not abrogate the rights of an insurer to a hearing and appeal of a disapproval as provided in that section.