806 KAR 12:150 - Annuity disclosures

RELATES TO: KRS 304.12-010, 304.12-020, 304.12-230, 26 U.S.C. 401, 403, 414, 457, 29 U.S.C. 1001-1461

NECESSITY, FUNCTION, AND CONFORMITY: KRS 304.2-110(1) authorizes the Commissioner of the Department of Insurance to promulgate administrative regulations necessary for or as an aid to the effectuation of any provision of the Kentucky Insurance Code, KRS Chapter 304. This administrative regulation requires insurers to deliver information to purchasers of annuities that will improve the buyer's ability to select the most appropriate annuity for the buyer's needs and improve the buyer's understanding of the basic features of the product that has been purchased or is under consideration.

Section 1. Definitions.
(1) "Buyer's Guide" means the current National Association of Insurance Commissioner's approved Annuity Buyer's Guide.
(2) "Charitable gift annuity" is defined in KRS 304.1-120(6)(b).
(3) "Contract owner" means the owner named in the annuity contract or certificate holder in the case of a group annuity contract.
(4) "Funding agreement" means an agreement for an insurer to accept and accumulate funds and to make one (1) or more payments at future dates in amounts that are not based on mortality or morbidity contingencies.
(5) "Generic name" means a short title descriptive of the annuity contract being applied for or illustrated.
(6) "Guaranteed elements" means the premiums and credited interest rates, including any bonus, benefits, values, noninterest based credits, charges, or elements of formulas used to determine any of these, that are guaranteed and determined at issue. An element is guaranteed if all of the underlying elements that go into its calculation are guaranteed.
(7) "Illustration" means a personalized presentation or depiction prepared for and provided to an individual consumer that includes nonguaranteed elements of an annuity contract over a period of years.
(8) "Nonguaranteed elements" means the premiums and credited interest rates including any bonus, benefits, values, non-interest based credits, charges, or elements of formulas used to determine any of these, that are subject to company discretion and are not guaranteed at issue. An element is nonguaranteed if any of the underlying nonguaranteed elements are used in its calculation.
(9) "Registered Product" means an annuity contract or life insurance policy subject to the prospectus delivery requirements of the Securities Act of 1933.
(10) "Structured settlement annuity" means:
(a) A "qualified funding asset" as defined in 26 U.S.C. 130(d); or
(b) An annuity that would be a qualified funding asset pursuant to 26 U.S.C. 130(d) except for the fact that it is not owned by an assignee under a qualified assignment.
Section 2. Applicability. This administrative regulation shall apply to all group and individual annuity contracts and certificates except:
(1) Immediate and deferred annuities that do not contain non-guaranteed elements;
(2)
(a) Annuities used to fund:
1. An employee pension plan that is covered by the Employee Retirement Income Security Act (ERISA), codified as 29 U.S.C. 1001 to 1461;
2. A plan described by 26 U.S.C. 401(a), (k), or 403(b), if the plan, for purposes of ERISA, is established or maintained by an employer;
3. A governmental or church plan defined in 26 U.S.C. 414 or a deferred compensation plan of a state or local government or a tax exempt organization under 26 U.S.C. 457; or
4. A nonqualified deferred compensation arrangement established or maintained by an employer or plan sponsor;
(b)
1. Notwithstanding paragraph (a) of this subsection, this administrative regulation shall apply to annuities used to fund a plan or arrangement that is funded solely by contributions an employee elects to make, whether on a pre-tax or after-tax basis, and if the insurance company has been notified that plan participants may choose from among two (2) or more fixed annuity providers and there is a direct solicitation of an individual employee by a producer for the purchase of an annuity contract; and
2. As used in this subsection, direct solicitation shall not include a meeting held by a producer solely for the purpose of educating or enrolling employees in the plan or arrangement;
(3) Non-registered variable annuities issued exclusively to an accredited investor or qualified purchaser as those terms are defined by the Securities Act of 1933 (15 U.S.C. Section 77a et seq.), the Investment Company Act of 1940 (15 U.S.C. Section 80a-1 et seq.), or the regulations promulgated under either of those acts, and offered for sale and sold in a transaction that is exempt from registration under the Securities Act of 1933 (15 U.S.C. Section 77a et seq.);
(4)
(a) Transactions involving variable annuities and other registered products in compliance with Securities and Exchange Commission (SEC) rules and Financial Industry Regulatory Authority (FINRA) rules relating to disclosures and illustrations, except that compliance with Section 3 of this administrative regulation shall be required after January 1, 2014, unless the SEC has adopted a summary prospectus rule or FINRA has approved for use a simplified disclosure form applicable to variable annuities or other registered products.
(b) Notwithstanding subsection (4) of this section, the delivery of the Buyer's Guide is required in sales of variable annuities, and if appropriate, in sales of other registered products.
(c) Nothing in this subsection shall limit the commissioner's ability to enforce the provisions of this administrative regulation or to require additional disclosure;
(5) Structured settlement annuities;
(6) Charitable gift annuities; and
(7) Funding agreements.
Section 3. Standards for the Disclosure Document and Buyer's Guide.
(1)
(a) If the application for an annuity contract is solicited personally by an agent, the applicant shall be given both the disclosure document described in subsection (3) of this section and the Buyer's Guide no later than the time of application.
(b) If the application for an annuity contract is taken by means other than a personal solicitation by an agent, the applicant shall be sent both the disclosure document described in subsection (3) of this section and the Buyer's Guide no later than five (5) business days after the completed application is received by the insurer.
1. With respect to an application received as a result of a direct solicitation through the mail:
a. Providing a Buyer's Guide in a mailing inviting prospective applicants to apply for an annuity contract shall satisfy the requirement that the Buyer's Guide be provided no later than five (5) business days after receipt of the application; and
b. Providing a disclosure document in a mailing inviting a prospective applicant to apply for an annuity contract shall satisfy the requirement that the disclosure document be provided no later than five (5) business days after receipt of the application.
2. With respect to an application received via the Internet:
a. Taking reasonable steps to make the Buyer's Guide available for viewing and printing on the insurer's Web site shall satisfy the requirement that the Buyer's Guide be provided no later than five (5) business days after receipt of the application; or
b. Taking reasonable steps to make the disclosure document available for viewing and printing on the insurer's Web site shall satisfy the requirement that the disclosure document be provided no later than five (5) business days after receipt of the application.
3. A solicitation for an annuity contract that is not personally solicited by an agent shall include a statement that the proposed applicant may obtain a free Annuity Buyer's Guide by contacting the Department of Insurance or the insurer.
(c)
1. If the Buyer's Guide and disclosure document described in subsection (3) of this section are not provided at or before the time of application, a free look period of no less than fifteen (15) days shall be provided for the applicant to return the annuity contract without penalty.
2. This free look period shall run concurrently with any other free look period provided under state law or administrative regulation.
(2) The following information shall be included in the disclosure document:
(a) The generic name of the contract, the company product name, if different, the form number, and the fact that it is an annuity;
(b) The insurer's name, physical address, website address, and telephone number;
(c) A description of the contract and its benefits, emphasizing its long-term nature, including the following information:
1. The guaranteed and nonguaranteed elements of the contract and their limitations, if any, including for fixed indexed annuities, the elements used to determine the index-based interest, such as the participation rates, caps, or spreads, and an explanation of how they operate;
2. An explanation of the initial crediting rate, or for fixed indexed annuities, an explanation of how the index-based interest is determined, specifying any bonus or introductory portion, the duration of the rate, and the fact that rates may change from time to time and shall not be guaranteed;
3. Periodic income options both on a guaranteed and nonguaranteed basis;
4. Value reductions caused by withdrawals from or surrender of the contract;
5. How values in the contract can be accessed;
6. The death benefit, if available, and how it will be calculated;
7. A summary of the federal tax status of the contract and any penalties applicable on withdrawal of values from the contract; and
8. An explanation of the impact of a rider, such as a long-term care rider or guaranteed living benefit;
(d) Specific dollar amount or percentage charges and fees shall be listed with an explanation of how they apply; and
(e) Information about the current guaranteed rate or indexed crediting rate formula for new contracts that contain a clear notice that the rate is subject to change.
(3) The disclosure statement shall comply with the minimum standards for readability and intelligibility established in 806 KAR 14:121.
Section 4. Report to Contract Owners. For annuities in the payout period that include non-guaranteed elements and for the accumulation period of a deferred annuity, the insurer shall provide each contract owner with a report, at least annually, on the status of the contract that contains at least the following information:
(1) The beginning and end date of the current report period;
(2) The accumulation and cash surrender value, if any, at the end of the previous report period and at the end of the current report period;
(3) The total amounts, if any, that have been credited, charged to the contract value or paid during the current report period; and
(4) The amount of outstanding loans, if any, as of the end of the current report period.
Section 5. Effective Date. The requirements of this administrative regulation shall not be implemented or enforced prior to the effective date, determined pursuant to KRS 13A.330, or July 1, 2021,, whichever is later.
Section 6. Incorporation by Reference.
(1) "Buyer's Guide for Deferred Annuities" published by the National Association of Insurance Commissioners, Revised 2013 is incorporated by reference.
(2) This material may be inspected, copied, or obtained, subject to applicable copyright law, at the Department of Insurance, 500 Mero Street, Frankfort, Kentucky 40601, Monday through Friday 8 a.m. to 4:30 p.m.
(3) This material is also available on the department's Web site at http://insurance.ky.gov.

Notes

806 KAR 12:150
33 Ky.R. 4299; 34 Ky.R. 293; 734; eff. 11-2-2007; 37 Ky.R. 1084; 1712; eff. 3-4-2011; 38 Ky.R. 326; 764; eff. 11-4-11; Crt eff. 2-26-2020; 47 Ky.R. 820, 1411, 1570; eff. 5-4-2021.

STATUTORY AUTHORITY: KRS 304.2-110

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