Massachusetts Variable and Indexed Products, Annuities and Life Settlements

This chapter covers the Massachusetts rules for products whose values are tied to investments or an index (variable life, indexed life and annuities, and variable annuities), the required provisions of a deferred annuity, and the Life Settlement Act, which governs selling an existing policy to a third party. Variable products are regulated by federal securities regulators as well as by the Division of Insurance, so both appear here.

Flexible premium and whole life policies

Variable life (211 CMR 95.00)

A variable life insurance policy is an individual policy whose amount or duration of insurance varies with the investment experience of a separate account the insurer keeps for it (211 CMR 95.01). 211 CMR 95.00 adds its own rules to the ordinary life policy requirements:

• Suitability. No variable life policy may be recommended or issued without reasonable grounds to believe it is suitable for the applicant, based on reasonable inquiry into the applicant’s insurance and investment objectives, financial situation and needs (95.02(3)).
• Cover page. It states prominently that cash values may increase or decrease with the separate account’s experience, subject to any minimum guarantees, and carries a 10-day free-look provision (95.08(1)).
• Grace period. At least 31 days for a scheduled-premium policy. For a flexible-premium policy, it starts when the policy’s values can no longer cover its charges and ends at least 61 days after the insurer mails the required report (95.08(4), (5)).
• Reinstatement. Within three years from the date of default for a scheduled-premium policy, on evidence of insurability (95.08(6)).
• Exchange right. If the policy has no fixed investment option, the owner may, during the first 24 policy months, exchange it without evidence of insurability for a permanent general account (fixed) policy for the same initial face amount (95.08(9)).
• Loans. Available after three years in force, with a loan value of at least 75% of the cash surrender value (95.08(12)).
• Incontestability. After two years in force during the insured’s lifetime; an increase in coverage that required proof of insurability is incontestable two years after the increase (95.08(15)).
• Illustrations. They may not project past investment experience into the future. Hypothetical rates of return may be used only if clearly labeled, and one of them must be 0% with maximum guaranteed charges (95.11(1)(i)).
• Disclosure. Before or when the application is signed, the applicant receives a summary of the policy’s features and charges and signs an acknowledgment of receipt. An SEC-effective prospectus satisfies the requirement to the extent it contains the information (95.11).
• Producer reporting. A person qualified to sell variable life in Massachusetts must immediately report to the Commissioner any disciplinary or license action by any federal, state or territorial regulatory, investigatory or prosecutorial authority, a securities exchange or association, or a securities regulator, and any judgment or injunction based on fraud, deceit, misrepresentation or a violation of insurance or securities law (95.02(8)).

For example, a policyholder who buys a variable universal life policy with no fixed investment option in March 2026 and decides within the first 24 months that they do not want investment risk can exchange it for a fixed permanent policy of the same initial face amount without evidence of insurability.

Equity index (Bulletin 98-17)

Division of Insurance Bulletin 98-17, “Individual Equity Indexed Products,” sets the Division’s guidelines for filing indexed policy forms. A product that is actually variable is treated under the laws for variable products. Its disclosure rules for an indexed policy:

• A prominent notice on the cover page describes the policy’s link to an external index and discloses that, while values may be affected by the index, the policy does not directly participate in any stock or equity investments
• The form discloses the minimum guaranteed rates to maturity, the guaranteed participation rate and any cap or floor, the formula for index credits, a substitute index if the named one is discontinued, and that on the insurer’s insolvency policyholders look to their state’s guaranty fund system
• The form must not describe indexing as participation in the stock market or an index such as the S&P 500, list the stocks in the index, or stress similarities to variable products or mutual funds. It may describe indexing as offering the potential for higher excess interest over the long term

Annuities

Deferred annuities (Mass. Gen. Laws ch. 175, § 144A½)

Massachusetts’s annuity nonforfeiture law is § 144A½, “Annuity contracts; required provisions.” An annuity may not be delivered in Massachusetts unless it contains these provisions, or ones at least as favorable to the contract holder (§ 144A½(a)):

• Paid-up annuity. When the owner stops paying considerations (premiums), or with the owner’s written consent, the insurer grants a paid-up annuity benefit.
• Cash surrender. If the contract provides a lump-sum settlement, the insurer pays a cash surrender benefit on surrender before annuity payments begin. It may defer that payment up to 6 months only with the Commissioner’s written approval.
• Minimum values. The minimum nonforfeiture amount is 87½% of the gross considerations credited each year, accumulated at interest, less prior withdrawals, an annual contract charge of $50, premium tax and any debt (§ 144A½(b)). The interest rate is the lesser of 3% and the five-year constant maturity Treasury rate reduced by 125 basis points, but not less than 1% (§ 144A½(c)).
• Death benefit. The cash surrender benefit may never be less than the minimum nonforfeiture amount, and the death benefit must be at least equal to the cash surrender benefit. A contract without cash surrender or death benefits at least equal to the minimum must say so prominently (§ 144A½(e), (h)).
• Small contracts. The insurer may end a deferred annuity by paying its value in cash if no considerations have been received for 2 full years and the paid-up benefit at maturity would be less than $20 a month (§ 144A½(a)).

For example, an owner who pays $10,000 into a deferred annuity in its first year has net considerations of $8,750 (87½%) for figuring the minimum value, accumulated at the contract’s nonforfeiture rate and reduced by the $50 annual charge.

Section 144A½ does not apply to reinsurance, employer retirement-plan group annuities (other than IRAs), variable annuities, investment annuities, immediate annuities, or a deferred annuity after payments have begun (§ 144A½(m)).

General account assets (Mass. Gen. Laws ch. 175, § 132G; 211 CMR 95.01)

The outline cites § 144A½, which does not address the general account. The provisions that do are these. An insurer’s general account is all of its assets other than those in separate accounts established under §§ 132F or 132G (211 CMR 95.01). A life insurer may establish separate investment accounts, independent of its general investment account, for variable contracts. To the extent the contracts provide, separate account assets equal to the account’s reserves and liabilities are not chargeable with liabilities from the insurer’s other business, and the account’s gains and losses are credited or charged without regard to the insurer’s other gains and losses (§ 132G).

Equity indexed annuities (Bulletin 98-17; § 144A½(c))

Bulletin 98-17’s rules apply to indexed annuities as well, with two more:

• The application must include, immediately above the signature line and in at least 10-point type, an acknowledgment that the applicant is applying for an equity indexed annuity, that the policy does not directly participate in any stock or equity investments, and that values other than guaranteed minimums are not guarantees.
• Marketing materials must disclose that the policy does not directly participate in stock or equity investments and that failure to keep the policy to maturity may result in no participation in the index.

For the period a deferred annuity gives substantive participation in an equity indexed benefit, the nonforfeiture interest reduction may be increased by up to an additional 100 basis points, subject to the Commissioner’s review (§ 144A½(c)).

Variable annuities (Mass. Gen. Laws ch. 175, §§ 132F, 132G, 132H)

A contract on a variable basis is a life policy or annuity whose benefits or values vary to reflect the investment results of a separate account; all amounts that must provide variable benefits are placed in that account (§ 132G). Section 132F lets insurers place pension contracts in separate accounts the same way. Under § 132G:

• The contract must describe how variable benefits are figured, state that they may decrease or increase, and say on its first page, prominently, that the benefits are on a variable basis
• The contract form, with any certificate and application form, must be on file with the Commissioner for 30 days before use, unless approved sooner
• An insurer may not issue variable contracts in Massachusetts until it satisfies the Commissioner that its operations will not be hazardous to the public or its policyholders

Separate account assets may be invested in common stocks and other securities, including shares of registered investment companies. No more than 10% of all separate account assets may be in any one corporation’s stock (other than open-end diversified investment companies) if, at the time the investment is made, those assets exceed $1 million (§ 132H).

Regulation of variable products (SEC, FINRA and Massachusetts) (211 CMR 95.03)

Variable annuities are regulated by state insurance commissions as well as by the SEC, and FINRA, an independent self-regulatory organization, regulates the securities industry, including sellers of variable annuities (U.S. Securities and Exchange Commission, Variable Annuities: What You Should Know). On the Massachusetts side:

• Massachusetts licenses variable life and variable annuity products as their own producer line of authority, separate from the life line (Mass. Gen. Laws ch. 175, § 162M(a)(5))
• The outline’s citation, 211 CMR 95.03, requires an insurer issuing variable life insurance to establish separate accounts under § 132F or § 132G, hold assets at least equal to the greater of the variable policies’ reserves or their benefit base, and value those assets at least monthly
• The replacement regulation calls variable annuities, variable life and other insurer contracts registered with the federal Securities and Exchange Commission “registered contracts.” In a replacement of one, the prospectus or offering circular is identified in place of a policy summary (211 CMR 34.02, 34.03(2))

Sidenote

Know this...

Selling a variable annuity or variable life policy in Massachusetts takes the separate variable life and variable annuity line of authority. Variable annuities are regulated by the Division of Insurance and the SEC, and their sellers by FINRA.

Life Settlement Act (Mass. Gen. Laws ch. 175, §§ 212–223E)

Definitions (Mass. Gen. Laws ch. 175, § 212)

• A life settlement contract is a written agreement in which a provider pays the owner something less than the expected death benefit in exchange for the policy or its death benefit. Its value must be greater than the cash surrender value or accelerated death benefit available when the owner applies.
• A policy loan, the policy’s own accelerated death benefit, a collateral assignment, and agreements among people closely related to the insured or with a substantial economic interest in the insured’s life are not life settlement contracts.
• A life settlement provider is the person who enters into the settlement with the owner. A life settlement broker is a person who, on behalf of the owner and for a fee or commission, offers or attempts to negotiate a settlement between the owner and a provider.
• A terminal illness is a condition a licensed health care professional certifies can reasonably be expected to result in death in 24 months or less. A chronic illness includes being unable to perform at least 2 activities of daily living.
• Stranger-originated life insurance (STOLI) is an arrangement to start a policy for the benefit of a third-party investor who has no insurable interest in the insured when the policy is issued. Trusts created to give the appearance of insurable interest and used to start policies for investors violate insurable interest laws.

Life settlement broker authority and licensing (Mass. Gen. Laws ch. 175, § 213)

No one may act as a life settlement provider or broker with an owner who lives in Massachusetts without a license from the Commissioner (§ 213(a)), with two exceptions:

• Life producers. A producer licensed as a resident with a life line of authority in Massachusetts or the home state for at least 1 year, and licensed in Massachusetts as a nonresident if not a resident, is deemed to meet the requirement and may act as a broker. The producer must notify the Commissioner within 30 days of first acting as one and pay the fee (§ 213(c)).
• Professionals. A licensed attorney, certified public accountant or accredited financial planner retained to represent the owner, and not paid directly or indirectly by the provider or purchaser, may negotiate for the owner without a broker license (§ 213(d)).

A broker license has the same term and fees as a producer license and is renewed on its anniversary date; failing to pay the renewal fee by the renewal date ends it (§ 213(b)). A provider may not use an unlicensed person to do a broker’s work, and a broker may not use an unlicensed person to do a provider’s (§ 213(i), (j)). A broker represents only the owner and owes the owner a fiduciary duty to follow the owner’s instructions and act in the owner’s best interest, however the broker is paid (§ 213(m)).

Disclosure to customers (Mass. Gen. Laws ch. 175, § 220)

No later than the date of application, the provider gives the owner, in a separate document the owner signs, disclosures that include (§ 220(a)):

• That alternatives exist, such as the policy’s own accelerated benefits
• That proceeds may be taxable, may be subject to creditors’ claims, and may affect eligibility for public assistance
• The right to rescind within 15 days after all parties sign. Rescission works only if the owner gives notice and repays all proceeds, premiums, loans and loan interest within that period; if the insured dies during it, the contract is treated as rescinded, subject to that repayment
• That proceeds are sent within 3 business days after the provider receives the insurer’s acknowledgment of the ownership and beneficiary change
• That conversion rights and waiver of premium benefits may be forfeited, and a change of ownership may limit the insured’s ability to buy more insurance
• The amount and method of calculating the broker’s compensation
• That the insured may be contacted about health status or address no more than once every 3 months if life expectancy is more than 1 year, and no more than once a month if it is 1 year or less
• A fraud warning: anyone who knowingly presents false information in a life settlement application or contract may be found guilty of a crime and subject to fines and prison

No later than when all parties sign, the broker gives the owner and provider a description of all offers and counteroffers, any affiliations, each broker’s compensation and a reconciliation of the gross offer to the owner’s net proceeds. The broker’s disclosure also states that failing to provide the required disclosures or rights is deemed an unfair trade practice under chapter 176D (§ 220(c)).

Fraudulent acts (Mass. Gen. Laws ch. 175, § 223A)

A fraudulent life settlement act includes knowingly, with intent to defraud, presenting false material information or concealing material information about an application, underwriting, a claim, premiums, ownership or beneficiary changes, or reinstatement or conversion, and engaging in stranger-originated life insurance. With the same intent, it includes failing to disclose to the insurer, when it asks, that the prospective insured has had a life expectancy evaluation by someone other than the insurer (§ 223A(b)). It is also fraudulent to:

• Enter into a settlement when one knows or reasonably should have known the policy was obtained through a false, deceptive or misleading application
• Issue, solicit or market a new policy for the purpose of, or with significant emphasis on, settling it
• Say a policy is free or without cost for any period unless the policy provides it, or advertise insurance as free for any period
• As a broker, place a settlement with a provider or financing entity under common control without disclosing the relationship to the owner

The Commissioner may investigate suspected fraudulent acts and anyone in the business of life settlements (§ 223A(d)).

Lesson summary

• Variable life (211 CMR 95): suitability, a 10-day free look, a 24-month exchange right, loans of at least 75% of cash surrender value, and illustrations including a 0% rate.
• Indexed products must say they do not directly participate in any stock or equity investments; an indexed annuity application carries an acknowledgment, immediately above the signature line, in at least 10-point type (Bulletin 98-17).
• Deferred annuities (§ 144A½): paid-up and cash surrender benefits, minimum values on 87½% of premiums at 1–3% interest less a $50 charge, a death benefit at least equal to the cash value, and cash surrender deferral of 6 months only with approval.
• Separate account assets are kept apart from the general account; variable contracts state that benefits may decrease or increase and say on the first page that they are on a variable basis (§ 132G). Variable products are regulated by the SEC, FINRA and the Division, and need the variable life and variable annuity line (§ 162M).
• Life settlements: a broker needs a license, but a life producer of at least 1 year may act as one and must notify the Commissioner within 30 days of starting; the broker owes the owner a fiduciary duty; the owner may rescind within 15 days; proceeds are sent within 3 business days after the insurer acknowledges the transfer; and STOLI and “free insurance” pitches are fraudulent acts (§§ 212–223A).