MO585

NAIC Model Laws, Regulations, Guidelines and Other Resources—January 2001

UNIVERSAL LIFE INSURANCE MODEL REGULATION

Table of Contents

Section 1. Authority

Section 2. Purpose

Section 3. Definitions

Section 4. Scope

Section 5. Valuation

Section 6. Nonforfeiture

Section 7. Mandatory Policy Provisions

Section 8. Disclosure Requirements

Section 9. Periodic Disclosure to Policyowner

Section 10. Interest-Indexed Universal Life Insurance Policies

Section 1. Authority

This regulation is promulgated under the authority of Section [insert applicable section], of the Insurance Laws of [insert

state], and is effective [insert date].

Section 2. Purpose

The purpose of this regulation is to supplement existing regulations on life insurance policies in order to accommodate the

development and issuance of universal life insurance plans.

Drafting Note: It is the position of the drafters of this regulation that universal life insurance is simply another competing type of life insurance which

should be treated, to the extent possible, in the same regulatory manner as other life insurance products. This regulation is designed to address those areas

where universal life insurance does not “fit” into the existing regulatory framework. This regulation does not supersede existing requirements relating to

filing, solicitation, advertising, etc., but is supplementary to them.

Section 3. Definitions

As used in this regulation:

A. “Cash surrender value” means the net cash surrender value plus any amounts outstanding as policy loans.

B. “Commissioner” means the Insurance Commissioner of this state.

Drafting Note: Insert the title of the chief insurance regulatory official wherever the term “commissioner” appears.

C. “Fixed premium universal life insurance policy” means a universal life insurance policy other than a

flexible premium universal life insurance policy.

D. “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.

E. “Interest-indexed universal life insurance policy” means any universal life insurance policy where the

interest credits are linked to an external referent.

Drafting Note: This definition is not intended to include those policies which only have a variable policy loan interest rate provision, but have no other link

to an external referent. This regulation presently addresses only the indexing of interest credits. The regulation does not preclude the indexing of other

factors, e.g., mortality or expenses. Should other products be developed which involve the indexing of factors other than interest credits, this regulation may

require modification. The regulation does not preclude insurance departments from adding requirements regarding the indexing of such other factors.

F. “Net cash surrender value” means the maximum amount payable to the policyowner upon surrender.

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G. “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.

Drafting Note: Universal life insurance policies may use designated amounts for different purposes. These include the following: the base upon which

interest credits are calculated; the amount subtracted from the policy’s face value to determine net amount at risk for calculation of mortality charges, and the

amount paid upon surrender. These amounts may all be the same or may be different. For purposes of this regulation, these amounts do not define policy

value, although they may be coincidentally equal to that amount as defined above.

Care should be taken not to place undue emphasis on the policy or “account” value. Very often the policy value is not directly available to the policyowner.

Instead, the policy value is an intermediate step used to determine benefits actually available to the policyowner such as cash surrender values, net cash

surrender values, death benefits, or maturity values. The benefits actually provided the policyowner should be considered in establishing valuation and

nonforfeiture standards.

H. “Universal life insurance policy” means a life insurance policy where 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.

Drafting Note: This regulation is specifically designed for individual life insurance policies. It is not intended, however, to prohibit the issuance of group

universal life insurance policies. States are free to adopt whatever portions of this regulation which are appropriate for group insurance and which are in

accordance with state law.

Unlike the unitary nature of traditional whole life insurance, a distinguishing feature of universal life insurance is the existence of an indeterminate policy

value from which specified periodic charges are deducted and to which specified periodic interest is credited at a rate not determined at issue. This

indeterminate policy value feature with separately identified charges and credits may or may not have a premium pattern predetermined by the insurer at

issue. Valuation and nonforfeiture treatment of these products varies depending upon the nature of the premium pattern. To distinguish these treatments, a

definitional distinction has been made between “flexible” and “fixed” premium policy forms.

Section 4. Scope

This regulation applies to all individual universal life insurance policies except variable universal life.

Section 5. 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.

The terminal reserve for the basic policy and any benefits and/or 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:

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

defined below:

(A) is the present value of all future guaranteed benefits at the date of valuation.

(B) is the quantity

PVFB

x+t

where 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.

and a

x+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.

NAIC Model Laws, Regulations, Guidelines and Other Resources—January 2001

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.

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.

x+t

where (a)-(b) is as described

in [insert reference to Section 4 of the Standard Valuation Law] 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.

x+t

and a

are defined in (B) above.

(D) is the sum of any additional quantities analogous to (C) which arise because of structural changes

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.

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.

Future guaranteed benefits are determined by (1) projecting the greater of the guaranteed maturity fund and

the policy value, taking into account future guaranteed maturity premiums, if any, and using all guarantees

of interest, mortality, expense deductions, etc., contained in the policy or declared by the insurer; and (2)

taking into account any benefits guaranteed in the policy or by declaration which do not depend on the

policy value.

All present values shall be determined using (i) an interest rate (or rates) specified by [insert reference to

the Standard Valuation Law] for policies issued in the same year; (ii) the mortality rates specified by the

[insert reference to the Standard Valuation Law] for policies issued in the same year or contained in such

other table as may be approved by the Commissioner for this purpose; and (iii) any other tables needed to

value supplementary benefits provided by a rider which is being valued together with the policy.

Drafting Note: To the extent that the insurer declares guarantees more favorable than those in the policy (contractual guarantees), such declared guarantees

shall be applicable to the determination of future guaranteed benefits.

The mortality and interest bases for calculating present values are the minimum standards in the Standard Valuation Law.

Ever since the adoption of the original Standard Valuation Law (SVL) in 1942, provision has been made for valuation calculations on the basis of

substandard mortality. (See Section 4G of SVL). While this provision has been used infrequently in the past, it is anticipated that substandard mortality will

be more frequently utilized in universal life insurance, given its flexible nature, to reflect the mortality classification assigned to the policy by the insurer.

In effecting structural changes, consistent methods are prescribed when calculating reserves. Several such methods are possible, but perhaps the simplest

such method would be that of maintaining proportionality between the Guaranteed Maturity Fund and Guaranteed Maturity Premium values and the current

face amount. In applying this method, Guaranteed Maturity Fund and Guaranteed Maturity Premium values could be calculated per dollar of face amount

and simply multiplied by the new face amount. This would eliminate much of the complexity involved in other methods.

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B. Alternative Minimum Reserves

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 the greater of (1) or (2).

(1) The reserve calculated according to the method, the mortality table, and the rate of interest

actually used.

(2) 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.

For universal life insurance reserves on a net level premium basis, the valuation net premium is PVFB

and for reserves on a Commissioners Reserve Valuation Method, the valuation net premium is

PVFB

(a)-

(b)

Section 6. Nonforfeiture

A. Minimum Cash Surrender Values for Flexible Premium Universal Life Insurance Policies Minimum cash

surrender values for flexible premium universal life

policies shall be determined separately for the basic policy and any benefits and riders for which premiums

are paid separately. The following requirements pertain to a basic policy and any benefits and riders for

which premiums are not paid separately.

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; all accumulations being 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.

Interest on the premiums and on all charges referred to in items (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.

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 Commissioner shall have the right to require

higher cash values unless the insurer provides adequate justification that the cash values are appropriate in

relation to the policy’s other characteristics.

The 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.

NAIC Model Laws, Regulations, Guidelines and Other Resources—January 2001

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.

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).

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.

The initial expense allowance shall be the allowance provided by [insert reference to Section 5 or 5cA of

the Standard Nonforfeiture Law for Life Insurance] 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.

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 [Section 5cE of the Standard Nonforfeiture Law

for Life Insurance], using the face amount and the latest maturity date permitted at that time under the

policy.

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

x+t where

x+t

and a

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 a

replaced by an annuity beginning on the date as of which the additional expense

allowance was determined.

Drafting Note: The drafters chose a whole life initial expense allowance for several reasons. Although highly flexible, universal life insurance is generally

considered a permanent life insurance plan. Most companies encourage a premium level which will provide lifetime insurance protection. Every universal

life insurance policy of which the drafters are aware has a “net level premium” that could be computed which would guarantee permanent protection. As a

result, it is expected that most universal life insurance policies will be sold as permanent plans.

Traditional whole life insurance, which is accorded a permanent plan expense allowance by the Standard Nonforfeiture Law (SNFL), is much more flexible

than is often realized. Premiums may be stopped with term coverage resulting, policy loans can result in “stop and go” premiums, or an arrangement to use

available dividends to pay premiums can be effected, all without the permanent plan expense allowance being affected. The SNFL does not require cash

values for many forms of term insurance. All other permanent plans develop an expense allowance greater than that for whole life insurance under the

SNFL.

The alternative of basing the initial expense allowance on a policyowner's “planned premium” was considered but rejected as artificial and subject to

substantial manipulation by agents and/or insurers.

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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 following requirements pertain to a basic policy and any benefits and riders for which

premiums are not paid separately.

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) is the present value of all future guaranteed benefits.

(B) is the present value of future adjusted premiums. The adjusted premiums are calculated as described in

[Sections 5 and 5-a or in paragraph (1) of Section 5-c], as applicable, of [the Standard Nonforfeiture Law

for Life Insurance, as amended in 1980]. If Section 5-c, paragraph (l) is applicable, the nonforfeiture net

level premium is equal to the quantity PVFB,

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.

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.

because of guarantees declared by the insurer after the issue date of the policy. a

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) is the sum of any quantities analogous to (B) which arise because of structural changes

in the policy.

Future guaranteed benefits are determined by (1) projecting the policy value, taking into account future

premiums, if any, and using all guarantees of interest, mortality, expense deductions, etc., contained in the

policy or declared by the insurer; and (2) taking into account any benefits guaranteed in the policy or by

declaration which do not depend on the policy value.

All present values shall be determined using (i) an interest rate (or rates) specified by [the Standard

Nonforfeiture Law for Life Insurance, as amended in 1980] for policies issued in the same year and (ii) the

mortality rates specified by [the Standard Nonforfeiture Law for Life Insurance, as amended in 1980] for

policies issued in the same year or contained in such other table as may be approved by the Commissioner

for this purpose.

Drafting Note: The types of quantities included in Subsection C are increased current interest rate credits guaranteed for a future period, decreased current

mortality rate charges guaranteed for a future period, or decreased current expense charges guaranteed for a future period.

NAIC Model Laws, Regulations, Guidelines and Other Resources—January 2001

C. Minimum Paid-Up Nonforfeiture Benefits

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 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 (1) 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 (2) in the case of a fixed premium policy the mortality and interest standards permitted for paid-up

nonforfeiture benefits by [the Standard Nonforfeiture Law for Life Insurance, as amended in 1980]. In lieu

of the paid-up nonforfeiture benefit, the insurer may substitute, upon proper request not later than sixty (60)

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.

Drafting Note: it is possible that policies will have secondary guarantees. Such guarantees should be taken into consideration when computing minimum

paid-up nonforfeiture benefits.

To preserve equity between policies on a premium paying basis and on a paid-up basis, present values must comply with Section 6A for flexible premium

universal life insurance policies and with Section 6B for fixed premium policies.

Ever since the adoption of the original Standard Nonforfeiture Law (SNFL) in 1942, provision has been made for nonforfeiture calculations on the basis of

substandard mortality. (See Sections 5, 5-a, and 5-c of SNFL.) While this provision has been used infrequently in the past, it is anticipated that substandard

mortality will be more frequently utilized in universal life insurance, given its flexible nature, to reflect the mortality classification assigned to the policy by

the insurer.

A charge may be made at the surrender of the policy provided that the result after the deduction of the charge is not less than the minimum cash surrender

value required by this section.

Section 7. Mandatory Policy Provisions

The policy shall provide the following:

A. Periodic Disclosure to Policyowner

The policy shall provide that the policyowner will be sent, without charge, at least annually, a report which

will serve to keep such policyowner advised as to the status of the policy. The end of the current report

period must be not more than three months previous to the date of the mailing of the report. Specific

requirements of this report are detailed in Section 9.

Drafting Note: Fixed premium universal life insurance policies may be required to contain a table of cash surrender or nonforfeiture values, by law. Such a

table of values is of little use for a flexible premium policy, since the premiums cannot be determined, and therefore, such table should not be required to be

included in the policy. Periodic disclosure to the policyowner is designed to fulfill the purpose of such a table of values, which, because of the nature of

universal life insurance, cannot be determined at issue for a flexible premium policy.

B. Current Illustrations

The annual report shall provide notice that the policyholder may request an illustration of current and future

benefits and values.

C. Policy Guarantees

The policy shall provide guarantees of minimum interest credits and maximum mortality and expense

charges. All values and data shown in the policy shall be based on guarantees. No figures based on

nonguarantees shall be included in the policy.

Drafting Note: Minimum and maximum guarantees are in addition to any index guarantees. If “guaranteed” credits and/or charges are also the “current”

credits and/or charges, such amounts may be included in the policy if clearly labeled. The maturity date is not considered a guarantee for purposes of this

section.

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D. Calculation of Cash Surrender Values

The policy shall contain at least a general description of the calculation of cash surrender values including

the following information:

(1) The guaranteed maximum expense charges and loads.

(2) Any limitation on the crediting of additional interest. Interest credits shall not remain conditional

for a period longer than twenty-four months.

(3) The guaranteed minimum rate or rates of interest.

(4) The guaranteed maximum mortality charges.

(5) Any other guaranteed charges.

(6) Any surrender or partial withdrawal charges.

E. Changes in Basic Coverage

If the policyowner has the right to change the basic coverage, any limitation on the amount or timing of

such change shall be stated in the policy. If the policyowner has the right to increase the basic coverage, the

policy shall state whether a new period of contestability and/or suicide is applicable to the additional

coverage.

F. Grace Period and Lapse

The policy shall provide for written notice to be sent to the policyowner’s last known address at least thirty

(30) days prior to termination of coverage.

A flexible premium policy shall provide for a grace period of at least thirty (30) days (or as required by

state statute) after lapse. Unless otherwise defined in the policy, lapse shall occur on that date on which the

net cash surrender value first equals zero.

Drafting Note: Fixed premium policies shall contain a provision providing for a standard grace period as required by state law.

G. Misstatement of Age or Sex

If there is a misstatement of age or sex in the policy, the amount of the death benefit shall be that which

would be purchased by the most recent mortality charge at the correct age or sex. The commissioner may

approve other methods which are deemed satisfactory.

H. Maturity Date

If a policy provides for a “maturity date,” “end date,” or similar date, then the policy shall also contain a

statement, in close proximity to that date, that it is possible that coverage may not continue to the maturity

date even if scheduled premiums are paid in a timely manner, if such is the case.

Section 8. Disclosure Requirements

Disclosure of information about the policy being applied for shall follow the standards in [insert citation to state equivalent of

the Life Insurance Illustrations Model Regulation].

NAIC Model Laws, Regulations, Guidelines and Other Resources—January 2001

Section 9. Periodic Disclosure to Policyowner

A. Requirements

The policy shall provide that the policyowner will be sent, without charge, at least annually, a report which

will serve to keep such policyowner advised of the status of the policy. The end of the current report period

shall be not more than three (3) months previous to the date of the mailing of the report.

B. The report shall include the following:

(1) The beginning and end of the current report period;

(2) The policy value at the end of the previous report period and at the end of the current report

period;

(3) The total amounts which have been credited or debited to the policy value during the current

report period, identifying each by type (e.g., interest, mortality, expense and riders);

(4) The current death benefit at the end of the current report period on each life covered by the policy;

(5) The net cash surrender value of the policy as of the end of the current report period;

(6) The amount of outstanding loans, if any, as of the end of the current report period;

(7) For fixed premium policies:

If, assuming guaranteed interest, mortality and expense loads and continued scheduled premium

payments, the policy’s net cash surrender value is such that it would not maintain insurance in

force until the end of the next reporting period, a notice to this effect shall be included in the

report;

(8) For flexible premium policies:

If, assuming guaranteed interest, mortality and expense loads, the policy’s net cash surrender value

will not maintain insurance in force until the end of the next reporting period unless further

premium payments are made, a notice to this effect shall be included in the report.

Drafting Note: These are the same standards as required in the Life Insurance Illustrations Model Regulation. A state could refer to that regulation instead

of including the standards here.

Section 10. Interest-Indexed Universal Life Insurance Policies

A. Initial Filing Requirements

The following information shall be submitted in connection with any filing of interest-indexed universal

life insurance policies (“interest-indexed policies”). All such information received shall be treated

confidentially to the extent permitted by law.

(1) A description of how the interest credits are determined, including:

(a) A description of the index;

(b) The relationship between the value of the index and the actual interest rate to be credited;

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(d) The allocation of interest credits, if more than one rate of interest applies to different

portions of the policy value;

(2) The insurer’s investment policy, which includes a description of the following:

(a) How the insurer addressed the reinvestment risks;

(b) How the insurer plans to address the risk of capital loss on cash outflows;

available or not available in sufficient quantities;

(d) How the insurer plans to address the risk that the indexed interest rate may fall below the

minimum contractual interest rate guaranteed in the policy;

(e) The amount and type of assets currently held for interest indexed policies;

(f) The amount and type of assets expected to be acquired in the future;

(3) If policies are linked to an index for a specified period less than to the maturity date of the policy,

a description of the method used (or currently contemplated) to determine interest credits upon the

expiration of such period.

(4) A description of any interest guarantee in addition to or in lieu of the index.

(5) A description of any maximum premium limitations and the conditions under which they apply.

B. Additional Filing Requirements

(1) Annually, every insurer shall submit a Statement of Actuarial Opinion by the insurer’s actuary

similar to the example contained in Section 10C.

(2) Annually, every insurer shall submit a description of the amount and type of assets currently held

by the insurer with respect to its interest-indexed policies.

(3) Prior to implementation, every domestic insurer shall submit a description of any material change

in the insurer’s investment strategy or method of determining the interest credits. A change is

considered to be material if it would affect the form or definition of the index (i.e., any change in

the information supplied in Section A above) or if it would significantly change the amount or

type of assets held for interest-indexed policies.

Drafting Note: Interest-indexed products present unique aspects which, due to the unknown future values of the index, are not precisely addressed by

current valuation laws. The drafters have considered and rejected approaches to valuation which would require the setting of arbitrary reserves and/or the

arbitrary dedication of specific amounts of surplus as being neither logical nor workable. In requiring the filing and evaluation of the above items, together

with an annual actuarial opinion, the drafters have attempted to preserve the basic principle of the valuation laws, which is to maintain the ability of the

insurer to meet its future contractual obligations.

It is assumed that the evaluation of the information provided in this Section together with the experience of insurers in writing indexed forms will lead to a

more scientific approach to valuation in the future.

The drafters believe that by focusing attention on cash flows and the quality and quantity of assets supporting indexed policy liabilities, most of the risks

associated with indexed products can be addressed by insurers and regulators in a manner which will provide adequate protection to the public while

permitting experimentation and diversity in minimizing the uncertainty associated with the valuation of these products.

NAIC Model Laws, Regulations, Guidelines and Other Resources—January 2001

C. Statement of Actuarial Opinion for Interest-Indexed Universal Life Insurance Policies

I,___________________________________________, am ____________________________________________

(Name) (position or relationship to Insurer)

for the XYZ Life Insurance Company (The Insurer) in the state of _______________________________.

(State of Domicile of Insurer)

I am a member of the American Academy of Actuaries (or if not, state other qualifications to sign annual statement actuarial

opinions).

I have examined the interest-indexed universal life insurance policies of the Insurer in force as of December 31, 20XX,

encompassing _______ number of policies and $__________ of insurance in force.

I have considered the provisions of the policies. I have considered any reinsurance agreements pertaining to such policies, the

characteristics of the identified assets and the investment policy adopted by the Insurer as they affect future insurance and

investment cash flows under such policies and related assets. My examination included such tests and calculations as I

considered necessary to form an opinion concerning the insurance and investment cash flows arising from the policies and

related assets.

I relied on the investment policy of the Insurer and on projected investment cash flows as provided by

__________________________, Chief Investment Officer of the Insurer.

The tests were conducted under various assumptions as to future interest rates, and particular attention was given to those

provisions and characteristics that might cause future insurance and investment cash flows to vary with changes in the level

of prevailing interest rates.

In my opinion, the anticipated insurance and investment cash flows referred to above make good and sufficient provision for

the contractual obligations of the Insurer under these insurance policies.

_____________________________________

Signature of Actuary

Drafting Note: The American Academy of Actuaries has offered to prepare appropriate guidelines which will delineate the various responsibilities of the

actuary in signing the Statement of Actuarial Opinion included in this regulation. Upon publication, these guidelines will become a part of the body of

actuarial literature which describes Generally Accepted Actuarial Principles and Practice.

If the actuary has not examined the underlying records, but has relied upon listings and summaries of policies in force, an appropriate statement of such

reliance should be included here.

Endnotes:

1. The maturity amount shall be the initial death benefit where the death benefit is level over the lifetime of the policy except for the existence of a

minimum-death-benefit corridor, or shall be the specified amount where the death benefit equals a specified amount plus the policy value or cash surrender

value except for the existence of a minimum-death-benefit corridor.

2. The Guaranteed Maturity Premium for both flexible and fixed premium policies shall be adjusted for death benefit corridors provided by the policy. The

Guaranteed Maturity Premium may be less than the premium necessary to pay all charges. This can especially happen in the first year for policies with large

first year expense charges.

3. Structural changes are those changes which are separate from the automatic workings of the policy. Such changes usually would be initiated by the

policyholder and include changes in the guaranteed benefits, changes in latest maturity date, or changes in allowable premium payment period. For

valuations on or after January 1, 1987, for fixed premium universal life policies with redetermination of all credits and charges no more frequently than

annually, on policy anniversaries, structural changes also include changes in guaranteed benefits, or in fixed premiums, unanticipated by the guaranteed

maturity premium for such policies at the date of issue, even if such changes arise from automatic workings of the policy. The recomputation of (B) above,

for fixed premium universal life structural changes, shall exclude from PVFB, the present value of future guaranteed benefits, those guaranteed benefits

which are funded by the excess of the insurer’s declared guarantees of interest, mortality and expenses, over the guarantees contained in the policy at the

date of issue.

4. Because this product is still developing, it is recommended that benefit charges not be restricted and regulatory treatment of cash values be limited to that

contained in this section for several reasons. First, further restrictions would limit the development of the product. Second, added restrictions would

discourage insurers from reducing non-guaranteed current benefit charges because such reductions could require reduced future benefit charges that could be

financially unsound for the insurer. Third, market pressures will encourage insurers to limit benefit charges.

Universal Life Insurance Model Regulation

MO-585-12

5. See footnote 3.

6. If the actuary does not choose to rely on an investment officer for the projected investment cash flows, this statement should be modified to show the

extent of the actuary’s reliance.

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Chronological Summary of Actions (all references are to the Proceedings of the NAIC).

1984 Proc. I 6, 31, 376, 514, 515-526 (adopted).

1988 Proc. I 9, 19-20, 494, 599-600, 627 (adopted change to footnote 3).

1989 Proc. II 13, 23, 414-415, 428-429, 431-442 (amended to include consumer disclosure requirement).

1990 Proc. I 6, 27, 438-439, 450-451, 453-463 (amended).

2000 Proc. 3

Quarter 13, 14, 88, 116, 119-135 (amended and reprinted).