On December 28, 2011, the New Jersey Department of Banking and Insurance (the “Department”) issued Bulletin 11-31 (the “Bulletin”) revising standards for equity indexed annuities (EIA), which are annuity contracts with a value based on performance of a specified equity-based index (or indices). The Bulletin comes in response to the evolution of EIA product designs, and in light of prevailing low interest rates.
Among other things, the Bulletin provides as follows:
- EIAs that are not considered variable products provide guaranteed minimum values that must comply with New Jersey’s indexed standard nonforfeiture law for individual deferred annuities.
- The insurer must inform the purchaser that performance of the equity index is not guaranteed, and that the portion of the equity index gain credited to the contract could increase or decrease.
- The Department notes that the amount to be credited to the EIA depends on “equity credit” (i.e. the amount credited to the contract at the end of a “term”) which is determined based on the term and changes in the index over that term (the manner for calculating the equity credit is more particularly specified in the Bulletin) and is also impacted by the “margin” or “threshold rate” deducted from equity index and any caps or floors on the index interest rate.
- The EIA form should prominently disclose on the face page that the benefits depend on performance of an equity index.
- The EIA form should specify the duration of the term(s) for purposes of equity credit calculation and describe the guaranteed cash surrender value in compliance with New Jersey’s indexed standard nonforfeiture law for individual deferred annuities, which cash surrender value at maturity must not be less than the annuity value.
- If the term of the policy or contract is more than a year, it must provide an equitable method to accrue benefits during the term.
The Bulletin applies to fixed EIA forms, as well as any fixed account option of a variable annuity form where the fixed account contains an equity indexed aspect.