NY UL Policy Form Re-Filings are Again Required Due to Change in Nonforfeiture Law

The interest rates that appear in a subsection of Standard Nonforfeiture Law for life insurance, §4221(n-1), were updated last year (Chapter 443 of the Laws of 2022) and became effective immediately upon the Governor’s signature, which occurred on July 21, 2022. Subsection 4221(n-1) applies to all universal life (UL) policies and to any variable universal life (VUL) policies for which an insurance company chose to use §4221(n-1) for nonforfeiture compliance, an option provided by Regulation 77. Under New York Department of Financial Services (DFS) regulatory framework, UL policies are those that credit additional amounts (i.e., policies with non-guaranteed elements).

While this update was needed to maintain consistency with the indexed changes to the maximum nonforfeiture interest rate and IRC 7702’s definition of life insurance, the actual wording in NY’s amendment to the law was likely unintentional and certainly unfortunate.

Under §4221(n-1), the allowable surrender charges are based on the “net level whole life annual premium at issue” (Net Level Premium). An interest rate is needed to determine this, and while the rates may be the same or similar, it is not the guaranteed minimum interest rate (GMIR). Prior to the law change, the interest rate used to calculate the Net Level Premium was required to be the higher of 4% or a rate specified in the policy. This meant that if a company wanted to use a rate greater than 4%, the rate had to be stated in the policy. But if 4% was used, then the rate did not need to be in the policy.

In most cases, when a guaranteed minimum interest rate of less than 4% was used (which has generally been the case for many years now), the 4% used for the nonforfeiture calculation was not included in the form. We speculate that this was, at least in part, to avoid policyholder confusion between this rate and the lower guaranteed minimum interest rate.

Section 4221(n-1)(1)(H) now reads:

"’Net level whole life annual premium at issue’ means an annual premium based on face amounts of insurance set forth in the policy and on the assumption of level annual premiums for life, the mortality table rate used to calculate the maximum mortality charges (but not greater than that permitted under item (iv) of subparagraph (A) of paragraph three of this subsection) and an interest rate based on the higher of four percent or that rate specified in the policy but not less than the lesser of four percent and the nonforfeiture interest rate per annum pursuant to paragraph ten of subsection (K) of this section.” (Stricken text was deleted by the amendment, and the new text is in bold.)

The importance of this change was not immediately recognized even, apparently, by DFS. The Life Bureau issued Filing Guidance on 7/12/2023 concerning this issue and how to address it with policy form filings.

If your UL policies do not include the interest rate used to determine the Net Level Premium in the policy form, then they need to be re-filed with new unique form numbers. This is true no matter when they were approved. If you are writing new business on the form, it needs to comply with this law.

Required Submissions:

There are two types of submissions.

• Contracts issued on or after 7/21/2022 need to be endorsed to include the interest rate used to calculate the Net Level Premium. The endorsement would need to be approved by the Department.

• New forms to replace the ones without the interest rate must be filed and approved to include the interest rate. DFS usually allows for a transition period, but the clock is already ticking, so these should be prepared quickly. Until the new forms are approved, the endorsement must be attached to all new issues.

For both types of submissions, a complete submission is required, including the forms, a revised Actuarial Memorandum, and a statement of self-support. The existing demonstration of self-support that supports the statement would likely still apply but would need to be documented for the new form numbers. The demonstration should be signed again so that the date is in close proximity to when the signed statement of self-support is submitted to DFS with the new filing.

It is important to note that DFS does not allow this interest rate to be bracketed as variable. Therefore, we recommend that this rate be listed on the schedule page so that if you change it in the future, a whole new policy is not needed. If your current policy’s spec page has its own form number, you can likely just re-file that and not need to re-file the entire policy. If your current product does not have separately numbered spec pages, you will have to create a new policy to submit for compliance with this mandate, and for that resubmission, we recommend giving the specifications page its own form number.

Paid-up Option:

If your UL policy is designed for nonforfeiture compliance under the expense allowance approach in §4221(n-1)(3)(B), the policy must provide an option for paid-up coverage. The paid-up option requirements are in §4221(n-1)(3)(B)(iii).

Prior to the 2022 amendment to the law, this paid-up option was to be calculated:

“…on the basis of an interest rate (not less than four percent) guaranteed in the policy for this purpose.”

This means the paid-up interest rate should already be in the policy form, and no action is needed. If the paid-up option interest rate is not already in the policy form, then it will need to be added.

After the 2022 amendment, the law reads:

“…on the basis of an interest rate (not less than the lesser of (AA) four percent and (BB) the nonforfeiture interest rate per annum pursuant to paragraph ten of subsection (K) of this section minus one percent) guaranteed in the policy for this purpose.”

If you wish to change the rate to take advantage of this alternate approach, you will need to make a filing. Under the new law, a 3.75% rate is currently permissible. With rising interest rates, this will likely be back to 4% in the future.

Regulation 77 (separate account/variable products):

The DFS guidance indicates that it does not apply to products complying with Regulation 77. While true, it isn’t quite as simple as that. If nonforfeiture compliance of the VUL is under §54.7(b)(2)(i) or (ii) of Reg 77, then the statutory change does not impact VUL products. However, if nonforfeiture compliance is under 54.7(a), then you have chosen to comply under 4221(n-1), and the statute does apply, and therefore these filing requirements do as well.

Group Universal Life Insurance:

The DFS filing guidance does not address group universal life insurance (GUL) at all. However, the Life Bureau’s position is that since there is no law or regulation addressing GUL, they only approve it if it complies with Individual UL standards. Therefore, our expectation is that DFS will apply this statutory change to GUL as well.