28 Tex. Admin. Code § 3.705

Current through Reg. 49, No. 43; October 25, 2024

Section 3.705 - Contract Requirements

Variable annuity contracts must conform to the requirements of this section in order to obtain the commissioner's approval.

(1) Filing of variable annuity contracts. All variable annuity contracts, all riders, endorsements, applications, and other documents which are attached to and made a part of the contract and which relate to the variable nature of the contract, shall be filed with the commissioner and approved, as applicable, by him or her prior to delivery or issuance for delivery in this state.

(A) Each variable annuity contract and related forms shall be filed according to Subchapter A (Board Order 40701) of this chapter (relating to Preparation and Submission of Individual Life Insurance and Annuity Forms).

(B) The commissioner may approve variable annuity contracts and related forms with provisions the commissioner deems to be not less favorable to the contract holder, certificate holder, and the beneficiary than those required by these sections.

(2) Mandatory contract provisions. Every variable annuity contract shall contain at least the following.

(A) The cover page or page corresponding to the cover page of each contract shall contain:

(i) a prominent statement that the benefits under the contract are on a variable basis; and

(ii) a prominent statement that the dollar amounts will vary to reflect the investment experience of a separate account or separate accounts.

(B) A full description of the investment increment factors to be used in computing dollar amounts of variable benefits or variable contractual payments of values thereunder, and may guarantee that expense and/or mortality results shall not adversely affect such dollar amounts. In the case of an individual variable annuity contract under which the expense and mortality results may adversely affect the dollar amount of benefits, the expense and mortality factors shall be stipulated in the contract. In computing the dollar amount of variable benefits or other contractual payments or values under an individual variable annuity contract:

(i) the annual net investment increment assumption shall not exceed 5.0% except with the approval of the commissioner;

(ii) to the extent that the level of benefits may be affected by future mortality results, the mortality factor shall be determined from the Annuity Mortality Table for 1949, Ultimate, or any modification of that table not having a higher mortality rate at any age, or, if approved by the commissioner, from another table.

(C) A provision designating the separate account to be used and stating that the portion of the assets of any such separate account equal to the reserves and other contract liabilities with respect to such account shall not be chargeable with liabilities arising out of any other business the company may conduct.

(D) As appropriate, a provision for a grace period.

(i) For individual variable annuities which provide for the payment of periodic stipulated payments, a grace period of 31 days within which any stipulated payment to the insurer falling due after the first may be made, during which period of grace the contract shall continue in force. The contract may include a statement of the basis for determining the date as of which any such payment received during the period of grace shall be applied to produce the values under the contract arising therefrom.

(ii) For group variable annuities, a provision that the contractholder or premium payor is entitled to a grace period of 31 days for the payment of any premium due except the first, during which grace period the contract shall continue in force, unless the contractholder or premium payor shall have given the insurer written notice of discontinuance in advance of the date of discontinuance and in accordance with the terms of the contract. The contract may provide that the contractholder or premium payor shall be liable to the insurer for the payment of pro rata premium for the time the contract was in force during such grace period.

(E) A provision that, at any time within two years from the date of default in making periodic stipulated payments to the insurer during the life of the annuitant and unless the cash surrender value has been paid, the contract may be reinstated upon payment to the insurer of such overdue payments as required by contract, and of all indebtedness to the insurer on the contract, including interest. The contract may include a statement of the basis for determining the date as of which the amount to cover such overdue payments and any indebtedness shall be applied to produce the values under the contract arising therefrom.

(F) A unique definition of any cash surrender values available under the contract.

(G) A provision for nonforfeiture benefits as defined in paragraph (3) of this section.

(H) A provision defining the documents which make up the entire contract.

(I) An identification of the owner of the contract.

(J) A provision stating that the company shall mail to the individual contractholder or group contractholder at least once each year after the first at his or her last address known to the company a statement reporting the investments held in the separate account.

(K) For individual variable annuities, a provision that the company shall mail to the contractholder at least once in each contract year, after the first at his or her last address known to the company, a statement reporting the status of the policy as of a date not more than four months previous to the date of mailing. In the case of an annuity contract under which payments have not yet commenced, the statement shall contain:

(i) the number of accumulation units credited to such contract and the dollar value of a unit; or

(ii) the value of the contract holder's account.

(3) Reserves and nonforfeiture benefits.

(A) The reserve liability for variable annuities shall be established pursuant to the Insurance Code, Article 3.28, in accordance with actuarial procedures that recognize the variable nature of the benefits provided and any mortality guarantees.

(B) The provisions of this paragraph relating to nonforfeiture benefits shall not apply to any:

(i) reinsurance;

(ii) group annuity contract purchases in connection with one or more retirement plan or plans of deferred compensation established or maintained by or for one or more employers (including partnerships or sole proprietorships), employee organizations, or any combination thereof, or other plans providing individual retirement accounts or individual retirement annuities under the Internal Revenue Code, §408, as now or hereafter amended;

(iii) premium deposit fund;

(iv) investment annuity;

(v) immediate annuity;

(vi) deferred annuity contract after annuity payments have commenced;

(vii) reversionary annuity; or

(viii) to any contract which is to be delivered outside this state through an agent or other representative of the company issuing the contract.

(C) To the extent that any variable annuity contract provides benefits which do not vary in accordance with the investment performance of a separate account before the annuity commencement date, such contract shall contain provisions which satisfy the requirements of the Insurance Code, Article 3.44b, and shall not otherwise be subject to this section.

(D) No variable annuity contract, except as stated in subparagraph (B) and (C) of this paragraph, shall be delivered or issued for delivery in this state unless it contains in substance the following provisions, or corresponding provisions which in the opinion of the commissioner are at least as favorable to the contractholder, upon cessation of payment of considerations under the contract.

(i) That upon cessation of payment of considerations under a contract, the company will grant a paid-up annuity benefit on a plan described in the contract that complies with subparagraph (H) of this paragraph. Such description shall include a statement of the mortality table, if any, and guaranteed or assumed interest rates used in calculating annuity payments.

(ii) If a contract provides for a lump sum settlement at maturity, or at any other time, that upon surrender of the contract at or prior to the commencement of any annuity payments, the company will pay in lieu of any paid-up annuity benefit a cash surrender benefit as described in the contract that complies with subparagraph (I) of this paragraph. The contract may provide that the company reserves the right, at its option, to defer the determination and payment of any cash surrender benefit for any period during which the New York Stock Exchange is closed for trading (except for normal holiday closing) or when the Securities and Exchange Commission has determined that a state of emergency exists which may make such determination and payment impractical.

(iii) A statement that any paid-up annuity, cash surrender, or death benefits that may be available under the contract are not less than the minimum benefits required by any statute of the state in which the contract is delivered and an explanation of the manner in which such benefits are altered by the existence of any additional amounts credited by the company to the contract, any indebtedness to the company on the contract, or any prior withdrawals from or partial surrenders of the contract.

(E) The minimum values as specified in this section of any paid-up annuity, cash surrender, or death benefits available under a variable annuity contract shall be based upon nonforfeiture amounts meeting the requirements of this paragraph. The minimum nonforfeiture amount on any date prior to the annuity commencement date shall be an amount equal to the percentages of net considerations (as specified in subparagraph (F) of this paragraph) increased (or decreased) by the net investment return allocated to the percentages of net considerations, which amount shall be reduced to reflect the effect of:

(i) any partial withdrawals from or partial surrenders of the contract;

(ii) the amount of any indebtedness on the contract, including interest due and accrued;

(iii) an annual contract charge not less than zero nor greater than $30 less the amount of any annual contract charge deducted from any gross considerations credited to the contract during such contract year; and

(iv) a transaction charge of $10 for each transfer to another separate account or to another investment division within the same separate account.

(F) The percentages of net considerations used to define the minimum nonforfeiture amount in subparagraph (E) of this paragraph shall meet the requirements of this subparagraph.

(i) With respect to contracts providing for periodic considerations, the net considerations for a given contract year used to define the minimum nonforfeiture amount shall be an amount not less than zero and shall be equal to the corresponding gross considerations credited to the contract during that contract year less an annual contract charge of $30 and less a collection charge of $1.25 per consideration credited to the contract during that contract year. The percentages of net considerations shall be 65% for the first contract year and 87.5% for the second and later contract years. Notwithstanding the provisions of the preceding sentence, the percentage shall be 65% of the portion of the total net consideration for any renewal contract year which exceeds by not more than two times the sum of those portions of the net considerations in all prior contract years for which the percentage was 65%.

(ii) With respect to contracts providing for a single consideration, the net consideration used to define the minimum nonforfeiture amount shall be the gross consideration less a contract charge of $75. The percentage of net consideration shall be 90%.

(G) Demonstration that a contract's nonforfeiture amounts comply with this paragraph shall be based on the following assumptions:

(i) values should be tested at the ends of each of the first 20 contract years;

(ii) a net investment return of 7.0% per year should be used;

(iii) if the contract provides for transfers to another separate account or to another investment division within the same separate account, one transfer per contract year should be assumed;

(iv) with respect to contracts providing for periodic considerations, monthly considerations of $100 should be assumed for each of the first 240 months;

(v) with respect to contracts providing for a single consideration, a $10,000 single consideration should be assumed; and

(vi) if the contract provides for allocation of considerations to both fixed and variable accounts, 100% of the considerations should be assumed to be allocated to the variable account.

(H) Any paid-up annuity benefit available under a variable annuity contract shall be such that its present value on the annuity commencement date is at least equal to the minimum nonforfeiture amount on the date. Such present value shall be computed using the mortality table, if any, and the guaranteed or assumed interest rates used in calculating the annuity payments.

(I) For variable annuity contracts which provide cash surrender benefits, the cash surrender benefit at any time prior to the annuity commencement date shall not be less than the minimum nonforfeiture amount next computed after the request for surrender is received by the company. The death benefit under such contracts shall be at least equal to the cash surrender benefit.

(J) Any variable annuity contract which does not provide cash surrender benefits or does not provide death benefits at least equal to the minimum nonforfeiture amount prior to the annuity commencement date shall include a statement in a prominent place in the contract that such benefits are not provided.

(K) Notwithstanding the requirements of this section, a variable annuity contract may provide under the situations specified in clause (i) or clause (ii) of this subparagraph that the company, at its option, may cancel the annuity and pay the contractholder its accumulated value and by such payment be released of any further obligation under such contract:

(i) if at the time the annuity becomes payable the accumulated value is less than $2,000, or would provide an income the initial amount of which is less than $20 per month; or

(ii) if prior to the time the annuity becomes payable under a periodic payment variable annuity contract no considerations have been received under the contract for a period of two full years, and both:

(I) the total considerations paid prior to such period, reduced to reflect any partial withdrawals from or partial surrenders of the contract; and

(II) the accumulated value, amounts to less than $2,000.

(L) For any variable annuity contract which provides, within the same contract by rider or supplemental contract provision, both annuity benefits and life insurance benefits that are in excess of the greater of cash surrender benefits or a return of the gross considerations with interest, the minimum nonforfeiture benefits shall be equal to the sum of the minimum nonforfeiture benefits for the annuity portion and the minimum nonforfeiture benefits, if any, for the life insurance portion computed as if each portion were a separate contract. Notwithstanding the provisions of subparagraph (E) of this paragraph, additional benefits payable in the event of total and permanent disability, as reversionary annuity or deferred reversionary annuity benefits, or as other contract benefits additional to life insurance, endowment, and annuity benefits, shall be disregarded in ascertaining the minimum nonforfeiture amounts, paid-up annuity, cash surrender, and death benefits required by this section. The inclusion of such additional benefits shall not be required in any paid-up benefits, unless such additional benefits separately would require minimum nonforfeiture amounts, paid-up annuity, cash surrender, and death benefits.

(4) Applications. The application for a variable annuity contract shall contain:

(A) a prominent statement that the benefits may increase or decrease in accordance with the experience of a separate account; and

(B) the portion of the premium allocable on the date of issue to any fixed dollar benefits and the portion allocable on the date of issue to the variable benefits.

28 Tex. Admin. Code § 3.705

The provisions of this §3.705 adopted to be effective February 5, 1985, 10 TexReg 250.