New York required annuity contract provisions (Ins. Law 3219, 4220, 4223)

Why New York prescribes annuity contract language

An annuity is a long-lived promise. The buyer may pay in for decades before a single income check arrives, so New York does not leave the key contract terms to each insurer's drafting. Insurance Law section 3219 lists the standard provisions every individual annuity or pure endowment contract delivered in New York must contain "in substance" (or in a form the Superintendent finds more favorable to the holder). Section 4223, the Standard Nonforfeiture Law for Annuities, guarantees that money paid in is not forfeited if payments stop. Section 4220 is the older nonforfeiture law; it now governs only contracts issued before the section 4223 operative date.

Section 3219 also reaches certain group annuity certificates, chiefly certificates issued to individuals for IRAs, which is why the statute speaks of "contract or certificate" throughout.

The section 3219 standard provisions

• Grace period: 31 days. After the first payment, a flexible- or scheduled-payment contract gives 31 days after each due date to pay. The contract stays in full force during grace. If the annuitant dies during grace, the insurer may deduct the unpaid payment from the death benefit.
• Incontestability: 2 years. Statements made to obtain the contract become incontestable after the contract has been in force for two years from issue during the lifetime of the person(s) involved. Statements about age, sex and identity are never covered by incontestability, and nonpayment is an exception.
• Entire contract. The contract, plus the application if a copy is attached, is the entire contract.
• Misstatement of age or sex. Benefits are adjusted to what the payments would have bought at the correct age or sex. Any over- or underpayment is charged or credited, with interest at a contract rate not exceeding 6% a year, against the current or next payments.
• Dividends. On a participating contract, the insurer must ascertain and apportion divisible surplus annually.
• Nonforfeiture options. The contract must state the options available if payments stop, and those options must meet section 4223.
• Reinstatement: within 3 years of default, unless the cash surrender value has been paid. The holder applies, pays all overdue payments and loans with interest (overdue payments at no more than 6% a year, compounded annually), and, if the insurer requires it, shows evidence of insurability.
• Free look: 10 to 30 days. The holder may return the contract within a period of not less than 10 nor more than 30 days after delivery for a refund of all consideration paid, including fees and charges. A contract sold by mail order must allow 30 days. For a contract with a market-value-adjusted surrender formula, the refund may instead be the cash surrender value plus all fees and charges deducted.

Provisions that cannot apply are left out. A single-payment contract has no grace period or reinstatement clause, and a non-participating contract has no dividend clause. If a contract allows loans, it may use an adjustable maximum loan rate, reset at least every 12 months but not more often than every 3 months.

Nonforfeiture under section 4223

If payments stop, the contract must give a paid-up annuity benefit. If the contract allows a lump-sum settlement, it must also offer a cash surrender benefit in place of the paid-up annuity. The insurer must reserve the right to defer paying a cash surrender for up to six months after demand. The contract must state the mortality table and interest rates behind its guaranteed values, and at least once each contract year the insurer must send a statement of the paid-up annuity, cash surrender and death benefits.

A small, dormant contract may be cashed out. If no considerations have been received for three full years and the accumulation is under $5,000 (or the paid-up benefit would be under $20 a month), the insurer may terminate the contract by paying the accumulation amount.

Section 4223 does not apply to reinsurance, employer group retirement annuities, premium deposit funds, variable annuities, immediate annuities, deferred annuities after payments begin, or reversionary annuities.

Exam tip: 31-day grace, 2-year incontestability, 3-year reinstatement, a 10-to-30-day free look (30 by mail), and a surrender payout that may be deferred up to 6 months.