69O-164.010. Universal Life Valuation and Nonforfeiture

(1) Scope. This rule encompasses all universal life insurance policies except variable contracts as defined under subsection 627.8015(2), Florida Statutes. This rule is effective July 1, 1994, for policies issued on and after that date. Except for sub-subparagraph (3)(a)2.b. and subsection (4), this rule will also apply to policies issued prior to July 1, 1994. Any insurer which, as of July 1, 1994, is holding reserves on universal life policies which are less than those produced by the methods defined in subsection (3) shall submit a plan to the department for its approval no later than September 30, 1994 outlining the procedure which the company will use to bring its universal life reserves into compliance with this rule. The transition from the reserves actually held to the reserves required by this rule shall begin no later than the calendar quarter ending on March 31, 1995 and shall be completed on or before December 31, 1999.

(2) Definitions. As used in this rule:

(a) “Cash Surrender Value” means the Net Cash Surrender Value plus any amounts outstanding as policy loans.

(b) “Fixed premium universal life insurance policy” means a universal life insurance policy other than a flexible premium universal life insurance policy.

(c) “Flexible premium universal life insurance policy” means a universal life insurance policy which permits the policyowner to vary, independently of each other, the amount or timing of one or more premium payments or the amount of insurance.

(d) “Net Cash Surrender Value” means the maximum amount payable to the policyowner upon surrender.

(e) “Policy Value” means the amount to which separately identified interest credits and mortality, expense, or other charges are made under a universal life insurance policy.

(f) “Universal life insurance policy” means any individual life insurance policy or rider, or any group master policy or individual certificate, under the provisions of which separately identified interest credits (other than in connection with dividend accumulations, premium deposit funds, or other supplementary accounts) and mortality and expense charges are made to the policy. A universal life insurance policy may provide for other credits and charges, such as charges for the cost of benefits provided by rider.

(3) Valuation.

(a) Requirements. The minimum valuation standard for universal life insurance policies shall be the Commissioners’ Reserve Valuation Method, as described below, for such policies, and the tables and interest rates specified below.

1. Commissioners’ Reserve Valuation Method. The terminal reserve for the basic policy and any benefits and riders for which premiums are not paid separately as of any policy anniversary shall be equal to the net level premium reserves less (C) and less (D), where:

2. Reserves by the net level premium method shall be equal to ((A) - (B))*r where (A), (B) and “r” are as defined below:

i. (A) is the present value of all future guaranteed benefits at the date of valuation. Future guaranteed benefits are determined by projecting the greater of the Guaranteed Maturity Fund, as defined below, and the policy value, taking into account:

A. Future Guaranteed Maturity Premiums, as defined below, if any, and using all guarantees of interest, mortality, expense deductions, etc. contained in the policy or declared by the insurer; and

B. Any benefits guaranteed in the policy or by declaration which do not depend on the policy value.

ii. (B) is the quantity (PVFB/ax)*ax + t, where

A. PVFB is the present value of all benefits guaranteed at issue assuming future Guaranteed Maturity Premiums are paid by the policyowner and taking into account all guarantees contained in the policy or declared by the insurer. The Guaranteed Maturity Premium for flexible premium universal life insurance policies shall be that level gross premium, paid at issue and periodically thereafter over the period during which premiums are allowed to be paid, which will mature the policy on the latest maturity date, if any, permitted under the policy (otherwise at the highest age in the valuation mortality table), for an amount which is in accordance with the policy structure. The Guaranteed Maturity Premium is calculated at issue based on all policy guarantees at issue (excluding guarantees linked to an external referent). The Guaranteed Maturity Premium for fixed premium universal life insurance policies shall be the premium defined in the policy which at issue provides the minimum policy guarantees.

B. ax and ax + t are present values of an annuity of one per year payable on policy anniversaries beginning at ages x and x + t, respectively, and continuing until the highest attained age at which a premium may be paid under the policy. The letter “x” is defined as the issue age and the letter “t” is defined as the duration of the policy.

iii. The letter “r” is equal to one, unless the policy is a flexible premium policy and the policy value is less than the Guaranteed Maturity Fund, in which case “r” is the ratio of the policy value to the Guaranteed Maturity Fund. The Guaranteed Maturity Fund at any duration is that amount which, together with future Guaranteed Maturity Premiums, will mature the policy based on all policy guarantees at issue.

b. (C) is the quantity ((a) - (b))*(ax + t/a * x)*r where (a) - (b) is as described in subsection 625.121(7), Florida Statutes, for the plan of insurance defined at issue by the Guaranteed Maturity Premiums and all guarantees contained in the policy or declared by the insurer. ax + t´ ax´ and r are defined above.

c. (D) is the sum of any additional quantities analogous to (C) which arise because of structural changes in the policy, with each such quantity being determined on a basis consistent with that of (C) using the maturity date in effect at the time of the change.

d. The Guaranteed Maturity Premium, the Guaranteed Maturity Fund and (B) above shall be recalculated to reflect any structural changes in the policy. This recalculation shall be done in a manner consistent with the descriptions above.

2. Interest and mortality rates. All present values shall be determined using:

a. An interest rate (or rates) specified in subsections 625.121(5) and 625.121(6), Florida Statutes, for policies issued in the same year;

b. The mortality rates specified in subsection 625.121(5), Florida Statutes, for policies issued in the same year; and

c. Any other tables needed to value supplementary benefits provided by a rider which is being valued together with the policy.

(b) Alternative Minimum Reserves.

1. If, in any policy year, the Guaranteed Maturity Premium on any universal life insurance policy is less than the valuation net premium for such policy, calculated by the valuation method actually used in calculating the reserve thereon but using the minimum valuation standards of mortality and rate of interest, the minimum reserve required for such contract shall be equal to the greater of a. or b.:

a. The reserve calculated according to the method, the mortality table, and the rate of interest actually used.

b. The reserve calculated according to the method actually used but using the minimum valuation standards of mortality and rate of interest and replacing the valuation net premium by the Guaranteed Maturity Premium in each policy year for which the valuation net premium exceeds the Guaranteed Maturity Premium.

2. For universal life insurance reserves on a net level premium basis, the valuation net premium is PVFB/ax, and for reserves on the Commissioners Reserve Valuation Method, the valuation net premium is (PVFB/ax) + ((a) - (b))/ax, where PVFB, ax, and (a)-(b) are as defined above.

(4) Nonforfeiture.

(a) Minimum Cash Surrender Values for Flexible Premium Universal Life Insurance Policies. Minimum cash surrender values for flexible premium universal life insurance policies shall be determined separately for the basic policy and any benefits and riders for which premiums are paid separately. The requirements of this subsection pertain to a basic policy and any benefits and riders for which premiums are not paid separately.

1.a. The minimum cash surrender value (before adjustment for indebtedness and dividend credits) available on a date as of which interest is credited to the policy shall be equal to the accumulation to that date of the premiums paid minus the accumulations to that date of:

i. The benefit charges,

ii. The averaged administrative expense charges for the first policy year and any insurance-increase years,

iii. Actual administrative expense charges for other years,

iv. Initial and additional acquisition expense charges not exceeding the initial or additional expense allowances, respectively,

v. Any service charges actually made (excluding charges for cash surrender or election of a paid-up nonforfeiture benefit), and

vi. Any deductions made for partial withdrawals.

b. All accumulations shall be at the actual rate or rates of interest at which interest credits have been made unconditionally to the policy (or have been made conditionally, but for which the conditions have since been met), and minus any unamortized unused initial and additional expense allowances.

c. Interest on the premiums and on all charges referred to in sub-sub-subparagraphs (i)-(vi) above shall be accumulated from and to such dates as are consistent with the manner in which interest is credited in determining the policy value.

2. The benefit charges shall include the charges made for mortality and any charges made for riders or supplementary benefits for which premiums are not paid separately. If benefit charges are substantially level by duration and develop low or no cash values, then the insurer must provide adequate justification that the cash values are appropriate in relation to the policy’s other characteristics.

3. The actual administrative expense charges shall include charges per premium payment, charges per dollar of premium paid, periodic charges per thousand dollars of insurance, periodic per policy charges, and any other charges permitted by the policy to be imposed without regard to the policyowner’s request for services.

4. The averaged administrative expense charges for any year shall be those which would have been imposed in that year if the charge rate or rates for each transaction or period within the year had been equal to the arithmetic average of the corresponding charge rates which the policy states will be imposed in policy years two through twenty in determining the policy value.

5. The initial acquisition expense charges shall be the excess of the expense charges, other than service charges, actually made in the first policy year over the averaged administrative expense charges for that year. Additional acquisition expense charges shall be the excess of the expense charges, other than service charges, actually made in an insurance-increase year over the averaged administrative expense charges for that year. An insurance-increase year shall be the year beginning on the date of increase in the amount of insurance by policyowner request (or by the terms of the policy).

6. Service charges shall include charges permitted by the policy to be imposed as the result of a policyowner’s request for a service by the insurer (such as the furnishing of future benefit illustrations) or of special transactions.

7. The initial expense allowance shall be the allowance provided by paragraphs (b), (c), and (d) of subsection 627.476(6), Florida Statutes, or by subparagraphs (a)2. and (a)3. of subsection 627.476(9), Florida Statutes, as applicable, for a fixed premium, fixed benefit endowment policy with a face amount equal to the initial face amount of the flexible premium universal life insurance policy, with level premiums paid annually until the highest attained age at which a premium may be paid under the flexible premium universal life insurance policy, and maturing on the latest maturity date permitted under the policy, if any, otherwise at the highest age in the valuation mortality table. The unused initial expense allowance shall be the excess, if any, of the initial expense allowance over the initial acquisition expense charges as defined above.

8. If the amount of insurance is subsequently increased upon request of the policyowner (or by the terms of the policy), an additional expense allowance and an unused additional expense allowance shall be determined on a basis consistent with the above and with paragraph 627.476(9)(e), Florida Statutes, using the face amount and the latest maturity date permitted at that time under the policy.

9. The unamortized unused initial expense allowance during the policy year beginning on the policy anniversary at age x + t (where “x” is the same issue age) shall be the unused initial expense allowance multiplied by ax + t/ax where ax + t and ax are present values of an annuity of one per year payable on policy anniversaries beginning at ages x + t and x, respectively, and continuing until the highest attained age at which a premium may be paid under the policy, both on the mortality and interest bases guaranteed in the policy. An unamortized unused additional expense allowance shall be the unused additional expense allowance multiplied by a similar ratio of annuities, with ax replaced by an annuity beginning on the date as of which the additional expense allowance was determined.

(b) Minimum Cash Surrender Values for Fixed Premium Universal Life Insurance Policies. For fixed premium universal life insurance policies, the minimum cash surrender values shall be determined separately for the basic policy and any benefits and riders for which premiums are paid separately. The requirements of this subsection pertain to a basic policy and any benefits and riders for which premiums are not paid separately.

1. The minimum cash surrender value (before adjustment for indebtedness and dividend credits) available on a date as of which interest is credited to the policy shall be equal to ((A) - (B) - (C) - (D)), where:

a. (A) is the present value of all future guaranteed benefits. Future guaranteed benefits are determined by projecting the policy value, taking into account

i. Future premiums, if any, and using all guarantees of interest, mortality, expense deductions, etc., contained in the policy or declared by the insurer; and

ii. Any benefits guaranteed in the policy or by declaration which do not depend on the policy value.

b. (B) is the present value of future adjusted premiums. The adjusted premiums are calculated as described in subsection 627.476(6) or in paragraph 627.476(9)(a), Florida Statutes, as applicable. If paragraph 627.476(9)(a), Florida Statutes, is applicable, the nonforfeiture net level premium is equal to the quantity PVFB/ax, where PVFB is the present value of all benefits guaranteed at issue assuming future premiums are paid by the policyowner and all guarantees contained in the policy or declared by the insurer, and ax is the present value of an annuity of one per year payable on policy anniversaries beginning at age x and continuing until the highest attained age at which a premium may be paid under the policy.

c. (C) is the present value of any quantities analogous to the nonforfeiture net level premium which arise because of guarantees declared by the insurer after the issue date of the policy. ax shall be replaced by an annuity beginning on the date as of which the declaration became effective and payable until the end of the period covered by the declaration.

d. (D) is the sum of any quantities analogous to (B) which arise because of structural changes in the policy.

2. All present values shall be determined using

a. An interest rate (or rates) specified by subsections 627.476(8) and 627.476(9), Florida Statutes, for policies issued in the same year, and

b. The mortality rates specified by subsections 627.476(8) and (9), Florida Statutes, for policies issued in the same year or contained in such other table as may be approved by the Commissioner for this purpose.

(c) Minimum Paid-Up Nonforfeiture Benefits.

1. If a universal life insurance policy provides for the optional election of a paid-up nonforfeiture benefit, it shall be such that its present value shall be at least equal to the net cash surrender value provided for by the policy on the effective date of the election. The present value shall be based on mortality and interest standards at least as favorable to the policyowner as:

a. In the case of a flexible premium universal life insurance policy, the mortality and interest basis guaranteed in the policy for determining the policy value; or

b. In the case of a fixed premium policy the mortality and interest standards permitted for paid-up nonforfeiture benefits by subsections 627.476(8) and 627.476(9), Florida Statutes.

2. In lieu of the paid-up nonforfeiture benefit, the insurer may substitute, upon proper request not later than sixty days after the due date of the premium in default, an actuarially equivalent alternative paid-up nonforfeiture benefit which provides a greater amount or longer period of death benefits, or, if applicable, a greater amount or earlier payment of endowment benefits.

Specific Authority 624.308(1), 625.121(12)(b), 627.476(10)(c) FS. Law Implemented 624.307(1), 625.121, 627.476 FS. History–New 6-30-94, Amended 3-9-95, 12-24-03, Formerly 4-164.010.