Life Insurance Illustrations

The three types of illustrations are:

Basic– used in the solicitations that cover all values in a policy.

Supplemental– used with basic but focuses on non-guaranteed benefits.

In-Forced– used after the policy has been enforced for one year.

The regulations that do not apply are: Variable based insurance, Annuities, Group, and Policies with death benefits of less than $10,000.

All insurance companies must appoint an illustration actuary, who is a member of the American Academy of Actuaries and in good standing to certify that the company’s illustrations comply Actuarial Standard of Practice for Compliance.

The actuary must inform the DOI of any adverse rulings regarding the illustrations in other jurisdictions. In addition, an officer of the insurance company must certify that the illustrations comply with Louisiana law. Annual certifications must be filed with the DOI.

Illustrations must contain the following: the name of the company; name and address of the producer; name, age, and gender of the proposed insured; underwriting class used to prepare the illustration; the form number of the policy with a generic name and company name; initial death benefit; dividend and other non-guaranteed elements.

Illustrations may not imply that the policy is anything other than insurance; misleading; imply that dividends are guaranteed; use an incomplete, inaccurate, or misleading illustration; imply that a policy has a vanishing premium if the reduction is financed by non-guaranteed elements of the policy; use the term “lapse supported” unless policy cannot build cash value; use illustrations that are not self- supporting.

Basic illustrations must show: date prepared; page number; attained age used in calculations; assumed premium payments; guaranteed death benefits and cash values; non- guaranteed benefits; the true surrender value; cash value; less surrender charges and set-offs for loans and interest.

Basic illustrations must use narrative and numerical summaries.

Numerical summaries must show values for policy years 5, 10, 20, and age 70. Copies must be presented to the applicant at or before delivery.

The applicant must sign a receipt for the illustrations containing a statement that has been explained that non-guaranteed elements are indeed not guaranteed.

The producer must also sign a statement reflecting the fact that the previously mentioned statement is not subject to change, and that no other illustrations were used.

Insurance companies must retain these for at least three years after the policy is no longer in force.

Annual Reports and Illustrations

In cases where illustrations are used, the insurance company must provide the policy owner an annual report that shows current death benefit, annual premium, current cash value, current dividend and application and outstanding loans.

Note: Annual report for a Universal Life policy is more detailed and contains essentially the same information found in the Policy Summary.

Negative impacts throughout the year on non-guaranteed benefits must be displayed. The policy owner must be advised the right to new Illustration rather than the mere report.

The company must supply this In Force Illustration within 30 days of the request.

Variable Life Insurance

Producers must be licensed as a Variable Contract Producer before selling contracts with variable based benefits. There is a fee of $10 for the license and each renewal.

Applicants must pass a written exam that has two parts:

Part one: Basic securities
Part two: Variable basic contracts

Note: Applicants who are registered as broker dealers or are associated with a broker dealer are exempt from part one of the exam. Applicants who have already passed any major securities exam are also exempt from taking part one.

Candidates who fail Part one must wait 30 days before retaking exam. The waiting period increases to 60 days after the second attempt and 90 days after the third.

Candidates who fail Part two must wait 20 days between reexaminations. There is a $15 dollar fee per examination; this includes all retakes.

Variable Contract Producers must inform the DOI of any legal action taken against them by Securities regulators.

The DOI may discipline Variable Contract Producers under the producer licensing laws.

Separate Accounts

Assets in Separate Accounts must be valued at least monthly. Companies must develop standards to avoid conflict of interest in dealing with these assets. The DOI regulates the services provided by the Account’s Investment Advisor. A person with access to the Account’s assets must be bonded. The Separate Account must maintain sufficient ready assets to adequately deal with withdrawals. All service fees, taxes, and management fees must be disclosed when the policy is delivered.

The Replacement of Existing Policies

Life insurance is unusual in that it becomes increasingly more valuable with age. The longer a policy has been enforced, the better it is for the insured. The process of placing a new life policy In Force at the expense of an existing policy is known as replacement.

The thrust of the replacement regulations is to mandate complete disclosure so that the consumer may have the facts to make their own decision. Replacement is not always bad, however, the DOI wants to stop abuses by producers and companies.

What Constitutes Replacement?

Replacement in any transaction in which any new policy is purchased and an existing policy is terminated. Other actions can also trigger replacement under the DOI’s rules.

Replacement also Includes:

Using a financed purchase

Selecting the Reduced Paid-Up or Extended Term non-forfeiture options in any existing policy when a new policy is being purchased

Amending the policy in such a way that either the benefits under the policy or the policy period are reduced

Reissuing the existing policy with any reduction of cash value

What is not Replacement?

Group insurance

Transactions in which existing contract is a non convertible term policy that will expire in less than 5 years

Policies used to fund Qualified pension and profit sharing plans

Deferred compensation plans

Credit insurance transactions

Prepaid funerals

Immediate annuities and those involving structured settlements

Producers Duties

Obtain a signed statement from the applicant as to whether replacement will take place

Sign a statement himself/herself as to whether replacement will take place and submit it to the replacing company

If replacement is involved, the producer must:

Leave with the applicant, at the time of the application, a copy of the DOI’s “Notice Regarding Replacement”. The producer must also leave a copy of any Sales Proposals which have been made. The insurance company must keep in their files any generic sales materials. Transcripts of electronic sales materials must be given to the applicant no later than the date of delivery.

Note: The DOI’s “Notice” contains generic information about replacement. The information statement is geared to one specific transaction.

Obtain from the applicant a list of all policies that will be replaced. The producer must also have the applicant sign a written receipt for all the materials that were used to comply with the DOI’s rule.

Submit to company, along with the application, copy of all Sales Proposals, the Information Statement, and a list of existing insurance companies who will be replaced.

Duties of Replacing Companies

Companies must require their producers to comply with all of the parts of the rule discussed above. Companies also have the duty to examine facts found in the Information Statement and verify the accuracy of any statements made about their policies in the Sales Proposals. They must also provide the applicant hardcopies of documentation within two business days for notices transmitted electronically.

The replacing company must furnish all existing insurance companies with copies of the Sales Proposals and the Information Statement within five business days. The company must also maintain a file of all of these documents for three years or until their next examination by the DOI.

In the case of replacement, the new policy must come with a 30 day Free Look.

Note: when the existing insurance company and replacing insurance company are the same, credit must be given for time elapsed under the incontestable clause and the suicide clause up to the amount of the original death benefit.

Companies may restrict producers from using any sales materials other than those approved by the company.

Companies who solicit directly rather than through producers must comply with the producer’s duties under the replacement regulations.

Duties of Existing Insurance Companies

Keep all documents related to replacement on file for at least five years.

Supply insured a summary of the policy values, including:

Current death benefits

Annual premium

Current cash value

Current dividend, and the dividend option presently selected

Any outstanding loans

For Universal Life Policies this information must include:

Start and end of the current reporting period

Current policy value, and the value at the end of the previous reporting period

Any amounts credited or debited during the current period

Net cash surrender value

Any outstanding loans

In the case where Replacement is triggered by a loan or partial surrender, the company must warn the insured that action may indeed impair guaranteed values under the contract.

Violations

Provided deceptive sales material

Fail to investigate as to whether replacement will take place

Intentionally record an incorrect answer regarding replacement

Hide the identity of the replacing insurance company from the existing insurance company

Prevent notice from being given to the existing insurance company

Accelerated Benefits

Accelerated benefits will be discussed more in that chapter

Note: this regulation does not apply to benefits regulated by the Long Term Care Act. Accelerated Benefits not regulated as LTC cannot be marketed as LTC.

Qualifying Events:

Terminal illness—a medical condition that would only allow the insured to survive with extra ordinary medical intervention, e.g. a heart transplant

Any condition which requires that the insured be permanently institutionalized

Any medical condition that, absent extensive treatment, drastically limits the insured’s life span

Any other event approved by the DOI

Note: Insurance companies may not discriminate among the different classes of qualifying events.

Solicitation

The producer must give the applicant a written disclosure of how accelerated benefits work, the triggering events, and the impact on other facets of the policy, no later than the time of the application.

For direct response sales, the disclosure must be given at the time of delivery. The right to a “Free Look” must accompany the disclosure.

For group policies, the disclosure must be part of the certificate.

A waiver of premium rider may be offered.

Premium

Must be based upon sound actuarial principles and approved by the DOI. It must be fully disclosed to the insured:

For sales made by a producer, no later than at the taking of the application

For direct response sales, at delivery

For group the cost must be part of the certificate of coverage

Effective Date – claims due to accidents must be covered immediately; sickness within 30 days.

Benefits and Taxes – benefits must be offered as a lump sum. There may be no restriction on the use of the benefits. When benefits are requested, the insurance company must send a statement to the policy owner and any irrevocable beneficiary as to the effect that the payment of the benefits will have on any values that might remain in the policy. If insurance is left in force after the payment of benefits, an amended schedule page must be issued. If the policy has been assigned or there is an irrevocable beneficiary named the insurance company must obtain the consent of the assignee or beneficiary before paying benefits. At the time of the application and at the time that benefits are requested, the insurance company must be advised that that benefits may be subject to tax and that the policy owner should seek tax advice. The taking of benefits will not affect any multiple indemnity rider on any remaining death benefits.

Viatical Settlements

Note: Viatical Settlements are separate contracts. It is logical to discuss them in conjunction with accelerated death benefits. A viatical is an alternative to an accelerated death benefit. In a viatical settlement, the insured sells the death benefit to a third party at a discounted rate. In an accelerated death benefit transaction, the funds come from the insurance company that issued the policy; in a viatical settlement, the funds come from a third party.

Why?

As with accelerated death benefits, the consumers are usually involved in a perilous situation. The statute prevents the dishonest from taking advantage of the situation.

What Does the Statute Do?

The statute regulates not only the contracts, the Viatical Settlements, but also the companies’ Viatical Settlement Providers, which offer these products and the producers who negotiate them.

Licensing and Regulation

Viatical Statements can be referred to as simply Viaticals or Living Benefit Agreements. The providers are licensed by the DOI. The insureds are referred to as viators. Viatical Investment Agents represent the Companies. They must be licensed in the viator’s home state. Viatical Brokers represent the viators or insureds. They must be licensed in the viator’s home state. Candidates for a license must apply to the DOI and pay the designated fees. The DOI will grant the license if the applicant:

Has provided a detailed plan of operation

Is competent, trustworthy, has a good reputation, as well as has sufficient experience and training

Is a legal entity that is in good standing

Has an adequate anti-fraud plan

Note: Resident and Nonresident Life and Annuities Producers may act as Viatical Brokers. Companies must file annual reports and are subject to DOI examination.

Providers must keep all vital and important documents on file for five years.

Discipline

The statute contains several reasons for suspension of a producer’s or company’s license including:

Failure to maintain license requirements

Showing conviction of fraud

A pattern of unreasonable payment

Using unapproved contracts or failing to honor contractual obligations

Failure to file annual reports

Note: Viatical Providers must comply with privacy statutes, including those related to medical records.

Viatical Providers, agent and brokers must comply with Fraudulent Viatical Settlement Act, which is similar to the Unfair Trade Practices Act. Persons engaged in the business must report any suspected violation to the DOI. Violations are considered and pursued under the Unfair Trade Practices Act by issuing notice, a hearing, fines, revocations, “cease and desist orders”, etc.

Disclosures to Viators

Providers through their producers must follow strict rules of disclosure during the settlement process, these include:

Possible alternatives to the viatical such as accelerated benefits, policy loans, etc.

When completing a transaction which have tax consequences, the viator should seek tax advice

Interruption of certain benefits as a result of the transaction such as Medicare

The transaction may adversely effect other rights and benefits under the insurance contract

Any relationship between the insurance company the contract provider

Possible loss of coverage for other individuals as in joint-life policies

The current death benefit available under the policy

Note: The viator has the absolute right to rescind the contract for three days after receiving the disclosures. The contract may also be rescinded within 15 days from the receipt of the first check. Death during the rescission period shall be considered a rescission.

The provider must communicate any change in beneficiary or ownership of the policy within 20 days.

The viator must also execute a document making disclosure of their medical condition as well as their understanding of the transaction and its consequences. The viator must also agree to release all medical records.

Note: The viator may be contacted to update his or her medical condition after execution of the contract. These contacts are limited to once a month for viators with a life expectancy of one year, and once every three months for greater life expectancies. The viator’s doctor must also attest to their competency to enter into the contract.

Advertising Restrictions for Viaticals

Advertising must not be misleading or untruthful.

Terms to look for include guaranteed, no risk, safe, backed by the government, etc.

Other prohibitions:

Using an insurance company or policy name without approval

Failing to advise of continued premium

Characterizing accelerated benefits or policy loans as unfair

Using the words free or without cost

Failing to state the names of all licensees involved

Implying that the government is involved with the transaction

Prohibited Practices

Life insurance policies must be in force for at least two years before they can be used to fund viaticals unless:

Viator’s spouse dies, or divorces the viator

Viator retires or becomes disabled

Viator’s relationship with his or her employer terminates for other reasons

Viator is bankrupt or in severe duress

Viator divests any interest in a closely held corporation

Viatical Settlement Purchasers

Viatical Providers sometimes market their rights to the insurance policy purchased under the Viatical Settlement Contract to others. These individuals are called Viatical Settlement Purchasers.

Before selling the rights, full disclosure must be made to the Viatical Purchaser; these include:

Purchaser will receive no returns until the death of the viator

Life insurance contract cannot be sold

Purchaser is responsible for premium payment

Possibility of the viator returning to health

Risk of contestability under the policy

Statute status of the purchaser under the policy

The purchaser must also be given full disclosure regarding:

Life expectancy of the viator

Contestability of the policy

Cost of maintaining the policy, and the status of any premium waiver

Any other information that might effect the purchaser’s rights under the policy

Purchasers have the right to rescind within three days of receiving these disclosures.

The Viatical Contracts, the Disclosure Statements, and all advertising must be filed with and approved by the Department of Insurance.

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