Life Insurance Disclosure, Policy Summaries and Illustrations

Wisconsin authorizes the Commissioner of Insurance to require insurers to give life insurance buyers information “that will improve their ability to select appropriate coverage” (s. 628.38, Wis. Stat.). Three rules carry that out for the documents a life producer handles: the buyer’s guide and policy summary (s. Ins 2.14, Wis. Adm. Code), illustrations (s. Ins 2.17), and the preliminary contract summary for annuity and deposit-fund features (s. Ins 2.15).

The Buyer’s Guide and Policy Summary (s. Ins 2.14)

Section Ins 2.14 applies to the sale of individual life insurance. It does not apply to annuities, credit life, group life, ERISA plan policies or variable life (s. Ins 2.14 (2) (b)).

The buyer’s guide

Every prospective purchaser receives the latest version of the NAIC life insurance buyer’s guide at the time the application is taken. An insurer that sells without intermediaries may deliver the guide with the policy instead, but only if it guarantees a 30 calendar day right to return the policy for a full refund of premium (s. Ins 2.14 (4) (c)).

The policy summary

The insurer designates each policy form covered by the illustration rule as one marketed either with or without an illustration (s. Ins 2.17 (4)). If the form is marketed without an illustration, the insurer must provide a policy summary when the policy is delivered (s. Ins 2.14 (4) (a)).

The policy summary describes only the guaranteed elements of the policy. It is titled “Statement of Policy Cost and Benefit Information” and shows (s. Ins 2.14 (3) (f)):

• the producer’s name and address and the insurer’s full name and address;
• the generic name of the policy and each rider, such as “whole life” or “10-year level term”;
• for the first 20 policy years and at least one age from 60 through 65 (or maturity, if earlier): the annual premium for the basic policy and for each optional rider, the guaranteed death benefit, the guaranteed cash surrender values, and any guaranteed endowment amounts;
• the policy loan interest rate, and whether it is charged in advance or in arrears; and
• the date the summary was prepared.

It must be a separate document, and nothing in it may be minimized or obscured. A zero is shown as a zero, never as a blank (s. Ins 2.14 (4) (b)). If the insurer reserves the right to raise the premium, the summary shows the maximum premium (s. Ins 2.14 (5) (i)).

Cost comparison indexes

Wisconsin allows only two cost comparison indexes, both built on guaranteed values with interest at 5% (s. Ins 2.14 (3), (4) (d), (e)):

Definitions

Surrender cost index

The yearly cost per $1,000 of death benefit if the policy is surrendered for its guaranteed cash value at the end of the period.

Net payment cost index

The same calculation with the cash value set at zero, for a client who means to keep the policy.

If indexes are shown, they appear for year 10 and year 20, and the insurer must explain that an index is useful only for comparing similar policies (s. Ins 2.14 (4) (f), (g)).

Illustrations and Proposals (s. Ins 2.17)

An illustration is “a presentation or depiction that includes non-guaranteed elements of a policy of life insurance over a period of years” (s. Ins 2.17 (3) (i)). The ledger or proposal a producer shows a client for a dividend-paying whole life or universal life policy is a “basic illustration” (s. Ins 2.17 (3) (b)), so every Wisconsin proposal that projects non-guaranteed values must follow this rule.

The rule covers group and individual life except variable life, annuities, credit life, and policies with no illustrated death benefit on any person over $10,000 (s. Ins 2.17 (2)).

With or without an illustration

If the insurer designates a form as one marketed without an illustration, no one may use an illustration for that policy before its first anniversary (s. Ins 2.17 (4) (b)). If the form is marketed with an illustration, a basic illustration that meets the rule is required.

What a basic illustration must contain

A basic illustration is labeled “life insurance illustration” and shows the insurer, the producer’s name and business address, the insured’s name, age and sex, the underwriting class, the generic name and form number, and the initial death benefit (s. Ins 2.17 (5) (a)). It is dated, and every page is numbered as “page 3 of 8” (s. Ins 2.17 (6) (a)). Guaranteed values are labeled guaranteed and appear before the non-guaranteed values, which are labeled non-guaranteed.

The illustration has three parts:

1. Narrative summary. A plain description of the policy, the premium, the riders and the column headings, and this statement: “This illustration assumes that the currently illustrated nonguaranteed elements will continue unchanged for all years shown. This is not likely to occur, and actual results may be more or less favorable than those shown” (s. Ins 2.17 (6) (b)).
2. Numeric summary. Death benefits and values for at least policy years 5, 10 and 20, and at age 70, on three bases: the policy guarantees; the insurer’s illustrated scale; and a midpoint scale using 50% of the illustrated dividends, or interest and charges halfway between the guaranteed and illustrated rates (s. Ins 2.17 (6) (c)).
3. Tabular detail. Premium outlay, guaranteed death benefit and guaranteed surrender value for each year from 1 to 10 and every fifth year after that to age 100 or maturity (s. Ins 2.17 (6) (e)).

The client signs a statement that “any non-guaranteed elements illustrated are subject to change and could be either higher or lower,” and the producer certifies having presented the illustration, having “explained that any non-guaranteed elements illustrated are subject to change,” and having made “no statements that are inconsistent with the illustration” (s. Ins 2.17 (6) (d)).

What an illustration may never do

Under s. Ins 2.17 (5) (b), no insurer or producer may:

• describe the policy as anything other than life insurance;
• state or imply that non-guaranteed elements are guaranteed;
• show performance better than the insurer’s illustrated scale;
• give the applicant an incomplete illustration;
• suggest premiums will stop being needed when they will not; or
• use the term “vanish” or “vanishing premium” for a plan to pay future premiums from non-guaranteed values.

A supplemental illustration may be used only alongside a basic illustration and may not be more favorable than it (s. Ins 2.17 (7)).

Delivery and after the sale

If an illustration was used and the policy is applied for as illustrated, a signed copy goes to the insurer with the application and a copy to the applicant. If the policy is issued differently, say at a higher rating class, a “Revised Illustration” conforming to the issued policy is sent with it and signed by the owner and producer no later than delivery. If no illustration was used, the producer certifies that in writing, the applicant acknowledges it, and an illustration of the issued policy is delivered with the policy (s. Ins 2.17 (8)). The insurer keeps these until 3 years after the policy is no longer in force.

For illustrated policies, the insurer sends an annual report. If the report does not include an in-force illustration, it must tell the owner not to consider replacing the policy without requesting a current illustration, and to contact the state insurance department if one is not received within 30 days of the request. The insurer must furnish an in-force illustration within 25 calendar days of the owner’s request (s. Ins 2.17 (9)).

The Preliminary Contract Summary (s. Ins 2.15)

Wisconsin’s annuity disclosure rule reaches beyond annuities themselves. It applies to deferred annuities and to “deposit funds, riders or provisions accepted in conjunction with insurance policies” (s. Ins 2.15 (2) (a)). Its exemptions include a deposit account used only to pay regular premiums, immediate annuities and individual retirement annuities (s. Ins 2.15 (3) (b)).

Before the insurer accepts the first payment, the buyer must receive a buyer’s guide and a Preliminary Contract Summary or Contract Summary. For a rider, that means before the first premium for the policy it is attached to (s. Ins 2.15 (8) (a)). The Preliminary Contract Summary is a separate document titled “Preliminary Contract Summary” that states (s. Ins 2.15 (5)):

• the producer’s and insurer’s names and addresses;
• whether there is any guaranteed death benefit during the deferral period;
• prominently, if there are no cash surrender values;
• prominently, if guaranteed cash values can be less than the payments made, that the contract “may result in loss if kept for only a few years”;
• any minimum or maximum premium;
• prominently, all fees, charges and loads, including surrender charges;
• that dividends, excess interest and current annuity rates are not guaranteed, if any presentation used them; and
• that the insurer will provide a Contract Summary on request.

Lesson summary

• The NAIC life insurance buyer’s guide is given when the application is taken.
• A policy summary of guaranteed values for the first 20 years is delivered with any policy marketed without an illustration.
• Only the surrender cost index and net payment cost index may be shown, at years 10 and 20, on guaranteed values.
• A sales ledger or proposal showing non-guaranteed values is a basic illustration under s. Ins 2.17.
• A basic illustration has a narrative summary, a numeric summary on guaranteed, illustrated and midpoint bases, and tabular detail, signed by the client and producer.
• Never call a premium “vanishing” or imply non-guaranteed values are guaranteed.
• A policy issued differently from what was applied for needs a signed Revised Illustration by delivery; in-force illustrations are due within 25 calendar days of request.
• Deferred annuities and deposit-fund riders need a buyer’s guide and Preliminary Contract Summary before the first payment.