B. In this Section, the following apply:
1. "Buyer's Guide" means a document that
contains the language in the Appendix to this Section or language approved by
the Director.
2. "Cash dividend"
means the current illustrated dividend that can be applied toward payment of
the gross premium.
3. "Equivalent
Level Annual Dividend" is calculated as follows:
a. Accumulate the annual cash dividends at 5%
interest compounded annually to the end of the 10th and 20th policy
years;
b. Divide each accumulation
in subsection (a) by an interest factor that converts the accumulation into one
equivalent level annual amount that, if paid at the beginning of each year,
would accrue to the values in subsection (a) over the periods stipulated in
subsection (a). If the period is 10 years, the factor is 13.207 and if the
period is 20 years, the factor is 34.719.
c. Divide the results in subsection (b) by
the number of thousands of the Equivalent Level Death Benefit to arrive at the
"Equivalent Level Annual Dividend."
4. "Equivalent Level Death Benefit" means the
amount of benefit of a policy or term life insurance rider calculated as
follows:
a. Accumulate the guaranteed amount
payable upon death, regardless of the cause of death, at the beginning of each
policy year for 10 and 20 years at 5% interest compounded annually to the end
of the 10th and 20th policy years, respectively.
b. Divide each accumulation in subsection (a)
by an interest factor that converts the accumulation into one equivalent level
annual amount that, if paid at the beginning of each year, would accrue to the
value in subsection (a) over the periods stipulated in subsection (a). If the
period is 10 years, the factor is 13.207 and if the period is 20 years, the
factor is 34.719.
5.
"Generic name" means a short title that is descriptive of the premium and
benefit patterns of a policy or a rider.
6. "Life Insurance Surrender Cost Index"
means the cost index that is calculated as follows:
a. Determine the guaranteed cash surrender
value, if any, available at the end of the 10th and 20th policy
years.
b. For policies
participating in dividends, add the terminal dividend payable upon surrender,
if any, to the accumulation of the annual Cash Dividends at 5% interest
compounded annually to the end of the period selected and add this sum to the
amount determined in subsection (a).
c. Divide the result in subsection (b)
(subsection (a) for guaranteed-cost policies) by an interest factor that
converts into an equivalent level annual amount that, if paid at the beginning
of each year, would accrue to the value in subsection (b) or subsection (a) for
guaranteed cost policies, over the periods stipulated in subsection (a)). If
the period is 10 years, the factor is 13.207 and if the period is 20 years, the
factor is 34.719.
d. Determine the
equivalent level premium by accumulating each annual premium payable for the
basic policy or rider at 5% interest compounded annually to the end of the
period stipulated in subsection (a) and dividing the result by the respective
factors stated in subsection (c). This amount is the annual premium payable for
a level premium plan.
e. Subtract
the result of subsection (c) from subsection (d).
f. Divide the result of subsection (e) by the
number of thousands of the Equivalent Level Death Benefit to arrive at the Live
Insurance Surrender Cost Index.
7. The Life Insurance Net Payment Cost Index
is calculated in the same manner as the comparable Life Insurance Cost Index
except that the cash surrender value and any terminal dividend are set at
zero.
8. "Policy Summary" means a
written statement describing elements of the policy, including:
a. The following prominently placed title:
Statement of Policy Cost and Benefit Information.
b. The name and address of the insurance
producer, or, if no producer is involved, a statement of the procedure to be
followed to receive responses to inquiries regarding the Policy
Summary.
c. The full name and home
office or administrative office address of the company by which the life
insurance policy is to be or has been written.
d. The generic name of the basic policy and
each rider.
e. For the first five
policy years and representative policy years thereafter sufficient to clearly
illustrate the premium and benefit patterns, including the years for which Life
Insurance Cost Indexes are displayed and at least one age from 60 through 65 or
maturity, whichever is earlier, the following amounts, where applicable:
i. The annual premium for the basic
policy;
ii. The annual premium for
each optional rider;
iii.
Guaranteed amount payable upon death at the beginning of the policy year
regardless of the cause of death except for suicide, or other specifically
enumerated exclusions provided by the basic policy and each optional rider,
with benefits provided under the basic policy and each rider shown
separately;
iv. Total guaranteed
cash surrender values at the end of the year with values shown separately for
the basic policy and each rider;
v.
Cash dividends payable at the end of the year with values shown separately for
the basic policy and each rider. Dividends need not be displayed beyond the
twentieth policy year; and
vi.
Guaranteed endowment amounts payable under the policy that are not included
under guaranteed cash surrender values in subsection (iv).
f. The effective policy loan annual
percentage interest rate, if the policy contains this provision, specifying
whether the rate is applied in advance or in arrears. If the policy loan
interest rate is variable, the Policy Summary shall include the maximum annual
percentage rate.
g. Life Insurance
Cost Indexes for 10 and 20 years but not beyond the premium-paying period.
Separate indexes shall be displayed for the basic policy and for each optional
term life insurance rider. The indexes need not be included for optional riders
that are limited to benefits such as accidental death benefits, disability
waiver of premium, preliminary term life insurance coverage of less than 12
months, and guaranteed insurability benefits, nor for basic policies or
optional riders covering more than one life.
h. The Equivalent Level Annual Dividend in
the case of participating policies and participating optional term life
insurance riders, under the same circumstances and for the same durations at
which Life Insurance Cost Indexes are displayed.
i. If the Policy Summary includes dividends,
a statement that dividends are based on the insurer's current dividend scale
and are not guaranteed and a statement in close proximity to the Equivalent
Level Annual Dividend as follows: "An explanation of the intended use of the
Equivalent Level Annual Dividend is included in the Life Insurance Buyer's
Guide."
j. A statement in close
proximity to the Life Insurance Cost Indexes as follows: "An explanation of the
intended use of these indexes is provided in the Life Insurance Buyer's
Guide."
k. The date on which the
Policy Summary is prepared. The Policy Summary shall consist of a separate
document. All information required to be disclosed shall not be minimized or
obscure. Any amounts that remain level for two or more years of the policy may
be represented by a single number that clearly indicates the amounts that are
applicable for each policy year. Amounts in subsection (8)(e) shall be listed
in total, not on a per thousand nor per unit basis. If more than one insured is
covered under one policy or rider, guaranteed death benefits shall be displayed
separately for each insured or for each class of insured if death benefits do
not differ within the class. Zero amounts shall be displayed as zero and shall
not be displayed as a blank space.
D.
General rules.
1. Each insurer shall maintain
at its home office or principal office for at least three years after its last
authorized use a copy of each form the insurer authorized for use.
2. A producer shall inform a prospective
purchaser, before commencing a life insurance sales presentation, that the
producer is acting as a life insurance producer and inform the prospective
purchaser of the full name of the insurance company that the producer is
representing. If an insurance producer is not involved in the sale, the insurer
shall inform the prospective purchaser of the insurance company's full
name.
3. An insurer or producer
shall not use terms such as financial planner, investment advisor, financial
consultant, or financial counseling to imply that the insurance producer is
generally engaged in an advisory business in which compensation is unrelated to
sales unless that is true.
4. If an
insurer or producer refers to policy dividends, the reference shall include a
statement that dividends are not guaranteed.
5. An insurer shall not use a system or
presentation that does not recognize the time value of money through the use of
appropriate interest adjustments for comparing the cost of two or more life
insurance policies unless the system or presentation is used to demonstrate the
cash flow pattern of a policy and the presentation is accompanied by a
statement disclosing that the presentation does not recognize that, because of
interest, a dollar in the future has less value than a dollar today.
6. In a presentation of benefits, an insurer
shall not display guaranteed and non-guaranteed benefits as a single sum unless
they are shown separately and in close proximity.
7. An insurer shall include with a statement
regarding the use of the Life Insurance Cost Indexes an explanation that the
indexes are useful only for the comparison of the relative costs of two or more
similar policies.
8. An insurer
shall include with a Life Insurance Cost Index that reflects dividends or an
Equivalent Level Annual Dividend a statement that it is based on the company's
current dividend scale and is not guaranteed.
9. If an insurer reserves the right to change
the premium for a basic policy or rider, the annual premium shall be the
maximum annual premium.
E. An insurer's failure to provide or deliver
a Buyer's Guide or a Policy Summary as provided in subsection (C) constitutes
an omission that misrepresents the benefits, advantages, conditions, or terms
of an insurance policy.
APPENDIX. Life Insurance Buyer's Guide
The face page of the Buyer's Guide shall read as
follows:
Life Insurance Buyer's Guide
This guide can show you how to save money when you shop for
life insurance. It helps you to:
- Decide how much life insurance you should buy,
- Decide what kind of life insurance policy you need,
and
- Compare the cost of similar life insurance policies.
Prepared by the National Association of Insurance
Commissioners
Reprinted by (Company Name)
(Month and year of printing)
The Buyer's Guide shall contain the following language at the
bottom of page 2:
The National Association of Insurance Commissioners is an
association of state insurance regulatory officials. This association helps the
various Insurance Departments to coordinate insurance laws for the benefit of
all consumers. You are urged to use this Guide in making a life insurance
purchase.
Buying Life Insurance
When you buy life insurance, you want a policy that fits your
needs without costing too much. Your first step is to decide how much you need,
how much you can afford to pay and the kind of policy you want. Then, find out
what various companies charge for that kind of policy. You can find important
differences in the cost of life insurance by using the life insurance cost
indexes that are described in this guide. A good life insurance producer or
company will be able and willing to help you with each of these shopping
steps.
If you are going to make a good choice when you buy life
insurance, you need to understand what kinds are available. If one kind does
not seem to fit your needs, ask about the other kinds that are described in
this guide. If you feel that you need more information than is given here, you
may want to check with a life insurance producer or company or books on life
insurance in your public library.
This guide does not endorse any company or policy.
The remaining text of the buyer's guide shall begin on page 3
as follows:
Choosing the Amount
One way to decide how much life insurance you need is to
figure how much cash and income your dependents would need if you were to die.
You should think of life insurance as a source of cash needed for expenses of
final illnesses, paying taxes, mortgages or other debts. It can also provide
income for your family's living expenses, educational costs and other future
expenses. Your new policy should come as close as you can afford to making up
the difference between (1) what your dependents would have if you were to die
now, and (2) what they would actually need.
Choosing the Right Kind
All life insurance policies agree to pay an amount of money
if you die. But all policies are not the same. There are three basic kinds of
life insurance.
1. Term
insurance
2. Whole life
insurance
3. Endowment insurance
Remember, no matter how fancy the policy title or sales
presentation might appear, all life insurance policies contain one or more of
the three basic kinds. If you are confused about a policy that sounds
complicated, ask the producer or company if it combines more than one kind of
life insurance. The following is a brief description of the three basic
kinds:
Term Insurance
Term insurance is death protection of a "term" of one or more
years. Death benefits will be paid only if you die within that term of years.
Term insurance generally provides the largest immediate death protection for
your premium dollar.
Some term insurance policies are "renewable" for one or more
additional terms even if your health has changed. Each time you renew the
policy for a new term, premiums will be higher. You should check the premiums
at older ages and the length of time the policy can be continued.
Some term insurance policies are also "convertible." This
means that before the end of the conversion period, you may trade the term
policy for a whole life or endowment insurance policy even if you are not in
good health. Premiums for the new policy will be higher than you have been
paying for the term insurance.
Whole Life Insurance
Whole life insurance gives death protection for as long as
you live. The most common type is called "straight life" or "ordinary life"
insurance, for which you pay the same premiums for as long as you live. These
premiums can be several times higher than you would pay initially for the same
amount of term insurance. But they are smaller than the premiums you would
eventually pay if you were to keep renewing a term insurance policy until your
later years.
Some whole life policies let you pay premiums for a shorter
period such as 20 years, or until age 65. Premiums for these policies are
higher than for ordinary life insurance since the premium payments are squeezed
into a shorter period.
Although you pay higher premiums, to begin with, for whole
life insurance than for term insurance, whole life insurance policies develop
"cash values" which you may have if you stop paying premiums. You can generally
either take the cash, or use it to buy some continuing insurance protection.
Technically speaking, these values are called "nonforfeiture benefits." This
refers to benefits you do not lose (or "forfeit") when you stop paying
premiums. The amount of these benefits depends on the kind of policy you have,
its size, and how long you have owned it.
A policy with cash values may also be used as collateral for
a loan. If you borrow from the life insurance company, the rate of interest is
shown in your policy. Any money that you owe on a policy loan would be deducted
from the benefits if you were to die, or from the cash value if you were to
stop paying premiums.
Endowment Insurance
An endowment insurance policy pays a sum or income to you -
the policyholder - if you live to a certain age. If you were to die before
then, the death benefit would be paid to your beneficiary. Premiums and cash
values for endowment insurance are higher than the same amount of whole life
insurance. Thus endowment insurance gives you the least amount of death
protection for your premium dollar.
Finding a Low Cost Policy
After you have decided which kind of life insurance fits your
needs, look for a good buy. Your chances of finding a good buy are better if
you use two types of index numbers that have been developed to aid in shopping
for life insurance. One is called the "Surrender Cost Index" and the other is
the "Net Payment Cost Index." It will be worth your time to try to understand
how these indexes are used, but in any event, use them only for comparing the
relative costs of similar policies. LOOK FOR POLICIES WITH LOW COST INDEX
NUMBERS.
What is Cost?
"Cost" is the difference between what you pay and what you
get back. If you pay a premium for life insurance and get nothing back, your
cost for the death protection is the premium. If you pay a premium and get
something back later on, such as a cash value, your cost is smaller than the
premium.
The cost of some policies can also be reduced by dividends;
these are called "participating" policies. Companies may tell you what their
current dividends are, but the size of future dividends is unknown today and
cannot be guaranteed. Dividends actually paid are set each year by the
company.
Some policies do not pay dividends. These are called
"guaranteed cost" or "non participating" policies. Every feature of a
guaranteed cost policy is fixed so that you know in advance what your future
cost will be.
The premiums and cash values of a participating policy are
guaranteed, but the dividends are not. Premiums for participating policies are
typically higher than for guaranteed cost policies, but the cost to you may be
higher or lower, depending on the dividends actually paid.
What Are Cost Indexes?
In order to compare the cost of policies, you need to look
at:
1. Premiums
2. Cash values
3. Dividends
Cost indexes use one or more of these factors to give you a
convenient way to compare relative costs of similar policies. When you compare
costs, an adjustment must be made to take into account that money is paid and
received at different times. It is not enough to just add up the premiums you
will pay and subtract the cash values and dividends you expect to get back.
These indexes take care of the arithmetic for you. Instead of having to add,
subtract, multiply and divide many numbers yourself, you just compare the index
numbers which you can get from life insurance producers and companies:
1. Life Insurance Surrender Cost
Index. This index is useful if you consider the level of the cash values to be
of primary importance to you. It helps you compare costs if at some future
point in time, such as 10 or 20 years, you were to surrender the policy and
take its cash value.
Life Insurance Net Payment Cost Index. This Index is useful
if your main concern is the benefits that are to be paid at your death and if
the level of cash values is of secondary importance to you. It helps you
compare costs at some future point in time, such as 10 or 20 years, if you
continue paying premiums on your policy and do not take its cash value.
There is another number called the Equivalent Level Annual
Dividend. It shows the part dividends play in determining the cost index of a
participating policy. Adding a policy's Equivalent Level Annual Dividend to its
cost index allows you to compare total costs of similar policies before
deducting dividends. However, if you make any cost comparisons of a
participating policy with a non participating policy, remember that the total
cost of the participating policy will be reduced by dividends, but the cost of
the non participating policy will not change.
How Do I Use Cost Indexes?
The most important thing to remember when using cost indexes
is that a policy with a small index number is generally a better buy than a
comparable policy with a larger index number. The following rules are also
important:
(1) Cost comparisons should
only be made between similar plans of life insurance. Similar plans are those
which provide essentially the same basic benefits and require premium payments
for approximately the same period of time. The closer policies are to being
identical, the more reliable the cost comparison will be.
(2) Compare index numbers only for the kind
of policy, for your age and for the amount you intend to buy. Since no one
company offers the lowest cost for all types of insurance at all ages and for
all amounts of insurance, it is important that you get the indexes for the
actual policy, age and amount which you intend to buy. Just because a
"Shopper's Guide" tells you that one company's policy is a good buy for a
particular age and amount, you should not assume that all of that company's
policies are equally good buys.
(3)
Small differences in index numbers could be offset by other policy features, or
differences in the quality of service you may expect from the company or its
producer. Therefore, when you find small differences in cost indexes, your
choice should be based on something other than cost.
(4) In any event, you will need other
information on which to base your purchase decision. Be sure you can afford the
premiums, and that you understand its cash values, dividends and death
benefits. You should also make a judgment on how well the life insurance
company or producer will provide service in the future, to you as a
policyholder.
(5) These life
insurance cost indexes apply to new policies and should not be used to
determine whether you should drop a policy you have already owned for awhile,
in favor of a new one. If such a replacement is suggested, you should ask for
information from the company that issued the old policy before you take action.
Important Things To Remember - A Summary
The first decision you must make when buying a life insurance
policy is choosing a policy whose benefits and premiums must closely meet your
needs and ability to pay. Next, find a policy which is also a relatively good
buy. If you compare Surrender Cost Indexes and Net Payment Cost Indexes of
similar competing policies, your chances of finding a relatively good buy will
be better than if you do not shop. REMEMBER, LOOK FOR POLICIES WITH LOWER COST
INDEX NUMBERS. A good life insurance producer can help you to choose the amount
of life insurance and kind of policy you want and will give you cost indexes so
that you make cost comparisons of similar policies.
Don't buy life insurance unless you intend to stick with it.
A policy which is a good buy when held for 20 years can be very costly if you
quit during the early years of the policy. If you surrender such a policy
during the first few years, you may get little or nothing back and much of your
premium may have been used for company expenses.
Read your new policy carefully, and ask the producer or
company for an explanation of anything you do not understand. Whatever you
decide now, it is important to review your life insurance program every few
years to keep up with changes in your income and
responsibilities.
