Accelerated Payment of the Death Benefit Under a Life Insurance Policy

NY-ADR

7/10/19 N.Y. St. Reg. DFS-28-19-00007-P
NEW YORK STATE REGISTER
VOLUME XLI, ISSUE 28
July 10, 2019
RULE MAKING ACTIVITIES
DEPARTMENT OF FINANCIAL SERVICES
PROPOSED RULE MAKING
NO HEARING(S) SCHEDULED
 
I.D No. DFS-28-19-00007-P
Accelerated Payment of the Death Benefit Under a Life Insurance Policy
PURSUANT TO THE PROVISIONS OF THE State Administrative Procedure Act, NOTICE is hereby given of the following proposed rule:
Proposed Action:
Amendment of Part 41 (Regulation 143) of Title 11 NYCRR.
Statutory authority:
Financial Services Law, sections 202, 302; Insurance Law, sections 301, 1113, 1304, 3201, 3209, 3230, 4217 and 4517
Subject:
Accelerated Payment of the Death Benefit Under a Life Insurance Policy.
Purpose:
Implement statutory amendments in Laws of 2017, ch. 300, Laws of 2014, chs. 465, 448, and Laws of 2010, ch. 563.
Substance of proposed rule (Full text is posted at the following State website: http://www.dfs.ny.gov):
Section 41.1, which specifies the purposes of the regulation, is revised to clarify that policies that accelerate death benefits under Insurance Law section 1113(a)(1)(C) and (D) must, on a standalone basis, meet requirements for federal tax qualification.
In Section 41.2, which contains the definitions for the regulation, the definition of “accelerated death benefits” is amended and new definitions are added consistent with the addition of new subparagraphs (E) and (F) to Insurance Law section 1113(a)(1). Additionally, footnotes to Internal Revenue Code (“IRC”) citations were deleted as unnecessary.
Section 41.3, which establishes rules for advertising accelerated death benefits, is amended to clarify that all advertising material for accelerated death benefits under Insurance Law section 1113(a)(1)(A), (B), (C) or (D) shall state that the receipt of those benefits may be taxable, and to require that all advertising material for benefits accelerated under Insurance Law section 1113(a)(1)(E) or (F) shall state that the benefits are not expected to receive favorable tax treatment.
Section 41.4, which contains disclosure requirements, is revised so that subdivision (b) applies to accelerated death benefits under Insurance Law section 1113(a)(1)(E) and (F), and requires tax disclosure in sales information, applications, claim forms and policies for such benefits. This section clarifies the disclosures required on application forms for acceleration under forms that are intended to be qualified long-term care (hereinafter “LTC”) insurance contracts for federal tax purposes and under those forms that are not. This section also applies the numerical computation disclosure requirements to all types of accelerated death benefits under Insurance Law section 1113(a)(1).
Section 41.5, regarding benefit levels, payment criteria, and policy provisions, is revised so that subdivision (e) applies to accelerated death benefits under Insurance Law section 1113(a)(1)(E) and (F).
Section 41.6, regarding benefit eligibility, is amended to apply to subparagraphs (E) and (F) of Insurance Law section 1113(a)(1) and to require that any policy providing benefits pursuant to those subsections must first accelerate benefits pursuant to Insurance Law section 1113(a)(1)(A), (B), (C) or (D) for which the policyowner or certificateholder qualifies under the same policy.
Section 41.8, regarding additional requirements under section 1113(a)(1)(C) or (D), is amended:
(i) to delete text that reads “and the policy or certificate shall meet all the applicable requirements of section 7702B of the Internal Revenue Code, as amended for a qualified LTC insurance contract or payments”, to be consistent with the recent statutory change to Insurance Law section 1113(a)(1)(D);
(ii) to add a new requirement for a policy or certificate that is not intended to be a qualified LTC insurance contract to specifically state that the contract is not intended to be a qualified LTC insurance contract;
(iii) to clarify disclosures that continue to be required for a policy or certificate that meets all the applicable requirements of IRC section 7702B, as amended for a qualified LTC insurance contract or payments;
(iv) to permit any advertisement, description, comparison, marketing material or illustration to include in the required disclosure, if applicable, the phrase “on account of chronic illness” instead of the phrase “for qualified long term care services” for policies that are not intended to be qualified LTC insurance contracts;
(v) to clarify, with respect to policies that are not intended to be qualified LTC insurance contracts for federal tax purposes, that advertising or marketing materials may include a description of the benefits and a comparison between such policy and a regular LTC insurance policy;
(vi) to clarify, with respect to policies that are intended to be qualified LTC insurance contracts, that advertising or marketing materials may include a statement of such intention as well as a description of benefits and comparison with regular LTC insurance;
(vii) to clarify that outlines of coverage must contain a specific notice to the buyer depending on the type of accelerated death benefit marketed;
(viii) to state that, except as otherwise provided in Insurance Regulation 187, in recommending the purchase or replacement of any policy or certificate issued under this section, a producer shall make reasonable efforts to determine the appropriateness of a recommended purchase or replacement;
(ix) to clarify the requirement that, on a stand-alone basis, the benefit payments will be subject to favorable tax treatment by the federal government and shall only be made if they qualify under IRC section 101(g)(3), and all other applicable federal laws, in order to maintain favorable tax treatment. However, an insurer may, on a non-discriminatory basis, coordinate the insurer’s benefit payments with payments made by other insurers, and may deny claims for payments that would not receive favorable tax treatment by the federal government;
(x) to include claim form disclosure requirements both for insurers that elect to coordinate benefits and for insurers that do not; and
(xi) to clarify that certain provisions in section 41.8, including those pertaining to protections against unintentional lapse, additional riders and separate premiums, post claim underwriting and notices about denial of benefits, records retention, benefit limitations or exclusions in the case of home health care, termination of benefits and records of lapses and replacements, are updated so that they only apply to policies or certificates that are intended to be qualified LTC insurance contracts.
Technical corrections were also made throughout Part 41 (i.e., citation corrections; replacement of the word “owner” with the words “policyowner or certificateholder”; replacement of the word “must” with the word “shall”; and the decapitalization of the word “federal”).
Text of proposed rule and any required statements and analyses may be obtained from:
James V. Regalbuto, Deputy Superintendent for Life Insurance, New York State Department of Financial Services, One State Street, New York, NY 10004, (212) 480-5027, email: james.regalbuto@dfs.ny.gov
Data, views or arguments may be submitted to:
Same as above.
Public comment will be received until:
60 days after publication of this notice.
Summary of Regulatory Impact Statement (Full text is posted at the following State website: http://www.dfs.ny.gov):
1. Statutory authority: The authority of the Superintendent of Financial Services (“Superintendent”) to promulgate the Third Amendment to Insurance Regulation 143 (11 NYCRR 41) derives from Financial Services Law (“FSL”) sections 202 and 302, and Insurance Law (“IL”) sections 301, 1113, 1304, 3201, 3209, 3230, 4217 and 4517.
Descriptions of the statutes providing authority for the proposed amendment are included in the full Regulatory Impact Statement posted on the website of the Department of Financial Services (“Department”) at https://www.dfs.ny.gov.
2. Legislative objectives: The legislature amended the laws related to acceleration of life insurance death benefits (“ADB”) through enactment of Chapter 563 of the Laws of 2010, Chapter 465 of the Laws of 2014, Chapter 448 of the Laws of 2014, and Chapter 300 of the Laws of 2017.
In Chapter 563 of the Laws of 2010 and Chapter 465 of the Laws of 2014, the legislature added IL subsections (E) and (F) to section 1113(a)(1), respectively, authorizing an additional ADB trigger, on a non-tax qualified basis, upon an insured’s having retained residency at a nursing home, or received end of life or palliative care, for a period of three or more months, with an expectation that the insured will retain such residency, or receive such care, until death. The legislative objective for both statutory amendments was to make more types of insurance coverage available to meet the specific needs (including financial) of an aging population and their families. The legislature also indicated that this legislation was designed to encourage individuals to finance their own long-term care needs, which may reduce future Medicaid program costs.
Chapter 448 of the Laws of 2014 amended IL section 3230(c) to reduce the time that an insurer must wait to pay benefits, from 14 days to five days, after the information required by IL section 3230(d) is properly transmitted to the policyholder, in writing, to allow policyholders to receive their ADBs faster.
Chapter 300 of the Laws of 2017 removed the following text from IL section 1113(a)(1)(D): “and the insurer that issues such policy is a QLTC insurance carrier under section 4980c of the Internal Revenue Code” (“IRC”). According to the legislature, the standard for triggering payment of an ADB for chronic illness was more restrictive than necessary for payments to be tax qualified under IRC section 101(g). The legislature believed that the amendment would enable life insurers who are not also qualified long-term care (“QLTC”) insurers to offer the ADB under IL section 1113(a)(1)(D). The legislature also revised IL section 3230 so that disclosure requirements would apply equally to all types of ADBs.
3. Needs and benefits: IL section 3201(c)(11)(B) requires the Superintendent to promulgate rules for, among other things, ADBs. Current Regulation 143, governing ADBs, has been in effect since 1992. This amendment implements the statutory revisions enacted since that time.
This amendment extends existing requirements to the new ADB triggers authorized in subparagraphs (E) and (F) of IL section 1113(a)(1), with appropriate modification and new definitions to reflect differences in the triggers and tax treatment of the benefit payments. Because receipt of accelerated death benefits under the new triggers is not expected to receive the same favorable federal tax treatment as other types of accelerated death benefits that may be available, the amendment requires insurers to disclose the differences to consumers.
IL section 1113(a)(1)(E)-(F) triggers require an “expectation” that the insured will remain a resident of a nursing home, or a recipient of end of life or palliative care, until death, respectively. To ensure objective analysis, this amendment requires certification of the expectation to be made by a licensed health care practitioner.
This amendment is revised to be consistent with the new timeframes adopted by Chapter 448 of the Laws of 2014, so that policyholders receive accelerated death benefits faster.
To correspond with the amendment made by Chapter 300 of the Laws of 2017, this proposed amendment clarifies that all life insurers licensed to do business in this state may offer ADBs pursuant to IL section 1113(a)(1)(D), while preserving the ability for QLTC insurers to offer benefits under IL section 1113(a)(1)(D), thereby expanding the options available to insurers and consumers without removing existing benefits. Because some ADBs under IL section 1113(a)(1)(D) may be intended to qualify as QLTC insurance contracts for federal tax purposes and others may not, this amendment requires insurers to disclose this information to consumers so that they can make informed purchase decisions. Similar requirements already exist for benefits offered under IL section 1113(a)(1)(C). This amendment clarifies that requirements apply to both subparagraphs (C) and (D) of IL section 1113(a)(1).
The legislature also amended IL section 3230 so that disclosure requirements apply equally to all types of ADBs. Prior thereto, IL section 3230 applied different disclosure requirements for ADBs under IL section 1113(a)(1)(D). Regulation 143 is amended to be consistent with that legislative change.
Finally, subparagraphs (C) and (D) of IL section 1113(a)(1) require accelerated payments to qualify under IRC section 101(g)(3) and all other applicable federal laws to maintain favorable tax treatment. The current regulation requires, in determining whether benefit payments will receive favorable tax treatment, an insurer to consider the payment of benefits from all insurance policies. Some insurers consider this requirement to be burdensome because consumers today are more likely to have multiple policies with different insurers and an insurer must coordinate benefits with other insurers before it is able to pay the claim. This amendment requires ADB payments to be designed so that, on a standalone basis, payments will be subject to favorable tax treatment under IRC section 101(g)(3). However, the insurer will no longer be required to engage in a coordination of benefits with other insurers if tax disclosure is provided to policyholders, although it may still, on a non-discriminatory basis, elect to coordinate and deny claims for non-qualified payments.
4. Costs: This amendment only impacts insurers, including insurers located in a rural area, desiring to make available to consumers the contractual right to accelerate the payment of life insurance benefits. No insurer is required to offer accelerated death benefits. For insurers who choose not to offer this type of benefit there is no cost. Also, this amendment relates to accelerated death benefits offered by insurers pursuant to IL sections 1113(a)(1)(D), (E), and (F). For insurers who only offer accelerated death benefits pursuant to IL sections 1113(a)(1)(A), (B), and (C) there would be no costs imposed under this amendment. Since this amendment is implementing legislative changes, most of the costs are attributable to the legislation rather than this amendment. For example, revisions to forms or disclosure documents to reduce the time an insurer must wait to pay benefits from 14 days to five days after the information required by IL section 3230(d) is transmitted to the policyholder in writing results from the 2014 amendment to IL section 3230, rather than this regulatory amendment. Similarly, revisions to disclosure documents for accelerated death benefits pursuant to IL section 1113(a)(1)(D) to comply with IL section 3230 result from the 2017 amendment to that section rather than this regulatory amendment.
For insurers, including those located in a rural area, that choose to develop or continue to issue policies offering benefits pursuant to IL section 1113(a)(1)(D), (E) or (F), costs associated with this amendment are expected to be minimal. Many insurers are already offering accelerated death benefits under the other various authorized triggers in IL section 1113(a)(1). Should insurers wish to develop or continue to issue an insurance product subject to this amendment, they may need to update application and/or claim forms and develop new policy forms to take advantage of the changes made to IL sections 1113(a)(1)(D) if they are not a qualified long-term care insurer or wish to design benefits that are not intended to be qualified long-term care contracts for federal tax purposes. Further, for insurers that already offer accelerated death benefits under contracts that are intended to be qualified long-term care insurance contracts for federal tax purposes, systems have already been developed to generate the required illustrations, numerical computations, application and claim forms, and policy forms. These systems can be leveraged to now develop policies that are not intended to be qualified long-term care insurance contracts or to revise disclosure forms in accordance with IL section 3230. For insurers that are not also qualified long-term care insurers that may now offer benefits pursuant to IL section 1113(a)(1)(D) for the first time, the cost of compliance should be similar to those costs estimated (discussed below) when accelerated death benefits were first authorized, increased for inflation and reduced where the insurer can leverage existing documents and systems previously developed for other accelerated death benefit triggers.
Insurers who wish to take advantage of the new accelerated death benefit triggers authorized under IL sections 1113(a)(1)(E) or (F) will have some initial costs to prepare policy forms, illustrations and disclosures. In 1991, industry representatives estimated initial costs to prepare policy forms to be, on average, less than $100, and to develop computer programming to provide illustrations and disclosures to be between $250 and $500 since such systems were already used to generate disclosures required by IL section 3209. The cost of compliance should be similar to those estimated costs when accelerated death benefits were first authorized, increased for inflation, and reduced where the insurer can leverage existing documents and systems previously developed for other accelerated death benefit triggers.
Amendment to section 41.8(z) of the regulation (previously 41.8(x)) is expected to result in cost savings to insurers since they will no longer be required to coordinate their benefit payments with benefit payments made under other policies to ensure that the accelerated payments under their policy will receive favorable federal tax treatment. After the amendment, insurers will only need to make sure that the payments under the insurer’s own policy, standing alone, would qualify for favorable federal tax treatment, as required by IL section 1113(a)(1)(C) and (D). The cost savings are difficult to estimate due to various factors including the insurers that issued the policies, the number of policies issued, and the tax limits in effect at the time of acceleration.
There are no costs to state or local governments.
5. Local government mandates: The amendment imposes no new programs, services, duties or responsibilities on any county, city, town, village, school district, fire district or other special district.
6. Paperwork: This amendment does not impose any new reporting requirements for insurers except that it extends to the new ADB triggers authorized under IL section 1113(a)(1)(E)-(F) the existing paperwork requirements applicable to ADBs under IL section 1113(a)(1)(A)-(D).
The amendment provides that insurers are no longer required to engage in coordinating benefits with other insurers to ensure that payments are only made if they receive favorable federal tax treatment. This portion of the amendment is expected to decrease paperwork for certain insurers.
7. Duplication: This amendment does not duplicate any existing law or regulation.
8. Alternatives: IL section 3201(c)(11)(B) requires the Superintendent to promulgate a regulation setting forth provisions for ADBs. Accordingly, there is no alternative to amending the regulation.
9. Federal standards: IL section 1113(a)(1)(C) and (D) requires an insured to be chronically ill as defined in IRC section 7702B and that the ADB payment be tax qualified under IRC section 101(g), and all other applicable federal laws, to maintain favorable federal tax treatment. The IRC requires compliance with certain provisions of the National Association of Insurance Commissioners Long Term Care Insurance Model Act and Regulation or more stringent state requirements. To a great extent, the language of the regulation is drafted to be consistent with those requirements.
10. Compliance schedule: All insurers licensed in New York must comply with this amendment if and when they choose to offer ADBs in their life insurance policies under IL section 1113(a)(1)(D), (E) or (F). The amendment will take effect 90 days after publication in the State Register.
Regulatory Flexibility Analysis
1. Small businesses: The Department of Financial Services finds that this amendment will not impose any adverse economic impact on small businesses and will not impose any reporting, recordkeeping or other compliance requirements on small businesses. The basis for this finding is that this amendment is directed at all life insurance companies and fraternal benefit societies authorized to do business in New York State, none of which come within the definition of “small business” as defined in State Administrative Procedure Act (“SAPA”) section 102(8). The Department reviewed filed reports on examination and annual statements of such authorized insurers and concluded that none of these entities come within the definition of “small business” because there are none that are both independently owned and have fewer than one hundred employees.
2. Local governments: This amendment does not impose any adverse economic impact, or reporting, recordkeeping, or other compliance requirements on any local governments because the amendment affects entities authorized to sell life insurance and annuity contracts, none of which are local governments.
Rural Area Flexibility Analysis
The Department of Financial Services finds that this amendment to Part 41, which reflects recent amendments made to the New York Insurance Law, including an amendment that an insurer issuing accelerated death benefits under Insurance Law section 1113(a)(1)(D) is no longer required to be a qualified long-term care insurance carrier under Internal Revenue Code section 4980C (26 U.S.C.S. section 4980C), does not impose any additional burden on persons located in rural areas, and will not have an adverse impact on rural areas because this amendment applies uniformly to regulated parties that do business in both rural and non-rural areas of New York State.
Job Impact Statement
The Department of Financial Services finds that this rule will not adversely impact jobs or employment opportunities in New York. This amendment reflects recent amendments made to the New York Insurance Law, including an amendment that an insurer issuing accelerated death benefits under Insurance Law section 1113(a)(1)(D) is no longer required to be a qualified long-term care insurance carrier under Internal Revenue Code section 4980C (26 U.S.C.S. section 4980C). This amendment should not impact jobs or employment opportunities for insurers or producers.