Annuity contracts on a variable basis

Issued and entered December 1, 1978 by Thomas C. Jones, Commissioner of Insurance

As indicated in Bulletin 78-22, the General Rules, R 500.629 to R 500.633, dealing with annuity contracts on a variable basis, become effective December 22, 1978. It is necessary to establish guidelines for the effective implementation of the General Rules. In particular, Rule 629(1) provides that a contract for an annuity on a variable basis shall not be delivered in this state unless it stipulates the investment increment factors to be used in computing the dollar amount of variable benefits or other variable contractual payments or values thereunder.

Investment increment factors, as used in Rule 629(1), refers to those items which determine the net rate of return, and thereby the dollar value of benefits, payments, or values under a variable annuity contract. Insurance Bureau staff shall not approve a contract for an annuity on a variable basis unless the following investment increment factors, when used in computing the dollar amount of variable benefits or other variable contractual payments or values thereunder, are stipulated in the contract:

1. investment income

2. investment management expenses

3. other investment expenses

4. realized and unrealized capital gains or losses

5. federal income taxes on realized capital gains, investment income, and fund assets

6. contingency charges for mortality risks

7. contingency charges for expense guarantees

8. profit charges

The assumed net investment increment and the investment management expenses are limited by the General Rules. The Bureau recognizes that the sixth, seventh, and eighth listed factors may be limited by the contract.

Any investment increment factors, in addition to those listed above, shall be stipulated in the contract. All investment increment factors shall be distinctly set forth in the contract under a separate heading entitled, "Investment Increment Factors."

Investment increment factors do not include such items as sales and administrative charges and premium taxes deducted from gross premiums to determine net contributions to the separate account. Nonetheless, these charges are contractual and should be adequately disclosed in the policy.

The Insurance Bureau staff shall also review contracts to ensure that all charges are stated separately. Where those charges are stated on a daily percentage basis, the staff shall also review the contracts to ascertain that those charges are also stated as an annual percentage rate.

Expense and mortality components, as used in Rule 629(1)(b), refer to the expense load and mortality assumption built into the rates that convert the accumulated value (units times value per unit) into a monthly income. In the past, these units have been combined into one factor. Subrule 629(1) requires these components to be stated separately. The mortality base, interest rate assumption, and expense component shall be stated.

A prospectus shall be submitted with any policy filed for approval. If a prospectus is issued for subaccounts (controlled mutual funds) of the variable account, a prospectus for each subaccount shall also be submitted.

These guidelines shall take effect February 15, 1979.