R20-6-212.02. Standards for Annuity Illustrations

A. Definitions. The definitions in A.R.S. § 20-1242 and this subsection apply to this Section. “Illustration” means a personalized presentation or depiction prepared for and provided to an individual consumer that includes non-guaranteed elements of an annuity contract over a period of years. “Indexing Method” means point-to-point, dialing averaging or monthly averaging. “Index Term” means the period over which indexed-based interest is calculated. “Market Value Adjustment” or “MVA” means a feature that is a positive or negative adjustment that may be applied to the account value and/or cash value of the annuity upon withdrawal, surrender, contract annuitization or death benefit payment based on either the movement of an external index or on the company’s current guaranteed interest rate being offered on new premiums or new rates for renewal periods, if that withdrawal, surrender, contract annuitization or death benefit payment occurs at a time other than on a specified guaranteed benefit date. “Registered product” means an annuity contract or life insurance policy subject to the prospectus delivery requirements of the Securities Act of 1933. B. An insurer or producer may elect to provide a consumer an illustration at any time, provided that the illustration is in compliance with this Section and: 1. Is clearly labeled as an illustration; 2. Includes a statement referring customers to the disclosure document and buyer’s guide provided to them at time of purchase for additional information about their annuity; and 3. Is prepared by the insurer or third party using software that is authorized by the insurer prior to its use, provided that the insurer maintains a system of control over the use of the illustration. C. An illustration furnished to an applicant for a group annuity contract or contracts issued to a single applicant on multiple lives may be either an individual or composite illustration representative of the coverage on the lives of members of the group or the multiple lives covered. D. The illustration shall not be provided unless accompanied by the disclosure document referenced in A.R.S. § 20-1242.02. E. When using an illustration, the illustration shall not: 1. Describe non-guaranteed elements in a manner that is misleading or has the capacity or tendency to mislead; 2. State or imply that the payment or amount of non-guaranteed elements is guaranteed; or 3. Be incomplete. F. Costs and fees of any type shall be individually noted and explained. G. An illustration shall conform to the following requirements: 1. The illustration shall be labeled with the date on which it was prepared; 2. Each page, including any explanatory notes or pages, shall be numbered and show its relationship to the total number of pages in the disclosure document (e.g., the fourth page of a seven-page disclosure document shall be labeled “page 4 of 7 pages”); 3. The assumed dates of premium receipt and benefit payout within a contract year shall be clearly identified; 4. If the age of the proposed insured is shown as a component of the tabular detail, it shall be issue-age plus the number of years the contract is assumed to have been in force; 5. The assumed premium on which the illustrated benefits and values are based shall be clearly identified, including rider premium for any benefits being illustrated; 6. Any charges for riders or other contract features assessed against the account value or the crediting rate shall be recognized in the illustrated values and shall be accompanied by a statement indicating the nature of the rider benefits or the contract features, and whether or not they are included in the illustration; 7. Guaranteed death benefits and values available upon surrender, if any, for the illustrated contract premium shall be shown and clearly labeled guaranteed; 8. Except as provided in subsection (G)(22) of this Section, the non-guaranteed elements underlying the non-guaranteed illustrated values shall be no more favorable than current non-guaranteed elements and shall not include any assumed future improvement of such elements. Additionally, non-guaranteed elements used in calculating non-guaranteed illustrated values at any future duration shall reflect any planned changes, including any planned changes that may occur after expiration of an initial guaranteed or bonus period; 9. In determining the non-guaranteed illustrated values for a fixed indexed annuity, the index-based interest rate and account value shall be calculated for three different scenarios: one to reflect historical performance of the index for the most recent 10 calendar years; one to reflect the historical performance of the index for the continuous period of 10 calendar years out of the last 20 calendar years that would result in the least index value growth (the “low scenario”); one to reflect the historical performance of the index for the continuous period of 10 calendar years out of the last 20 calendar years that would result in the most index value growth (the “high scenario”). The following requirements apply: a. The most recent 10 calendar years and the last 20 calendar years are defined to end on the prior December 31, except for illustrations prepared during the first three months of the year, for which the end date of the calendar year period may be the December 31 prior to the last full calendar year; b. If any index utilized in determination of an account value has not been in existence for at least 10 calendar years, indexed returns for that index shall not be illustrated. If the fixed indexed annuity provides an option to allocate account value to more than one indexed or fixed declared rate account, and one or more of these indexes has not been in existence for at least 10 calendar years, the allocation to such indexed account or accounts shall be assumed to be zero; c. If any index utilized in determination of an account value has been in existence for at least 10 calendar years but less than 20 calendar years, the 10 calendar year periods that define the low and high scenarios shall be chosen from the exact number of years the index has been in existence; d. The non-guaranteed element or elements, such as caps, spreads, participation rates, or other interest crediting adjustments, used in calculating the non- guaranteed index-based interest rate shall be no more favorable than the corresponding current element or elements; e. If a fixed indexed annuity provides an option to allocate the account value to more than one indexed or fixed declared rate account: i. The allocation used in the illustration shall be the same for all three scenarios; and ii. The 10 calendar year periods resulting in the least and greatest index growth periods shall be determined independently for each indexed account option. f. The geometric mean annual effective rate of the account value growth over the 10 calendar year period shall be shown for each scenario; g. If the most recent 10 calendar year historical period experience of the index is shorter than the number of years needed to fulfill the requirement of subsection (I) of this Section, the most recent 10 calendar year historical experience of the index shall be used for each subsequent 10 calendar year period beyond the initial period for the purpose of calculating the account value for the remaining years of the illustration; h. The low and high scenarios: i. Need not show surrender values (if different than account values); ii. Shall not extend beyond 10 calendar years (and therefore are not subject to the requirements of subsection (I) of this Section beyond subsection (I)(1)(a) of this Section); and iii. May be shown on a separate page; i. For the low and high scenarios, a graphical presentation shall also be included comparing the movement of the account value over the 10 calendar year period for the low scenario, the high scenario and the most recent 10 calendar year scenario; and j. The low and high scenarios should reflect the irregular nature of the index performance and should trigger every type of adjustment to the index-based interest rate under the contract. The effect of the adjustments should be clear; for example, additional columns showing how the adjustment applied may be included. If an adjustment to the index-based interest rate is not triggered in the illustration (because no historical values of the index in the required illustration range would have triggered it), the illustration shall so state; 10. The guaranteed elements, if any, shall be shown before corresponding non-guaranteed elements and shall be specifically referred to on any page of an illustration that shows or describes only the non-guaranteed elements (e.g., “see page 1 for guaranteed elements”); 11. The account or accumulation value of a contract, if shown, shall be identified by the name this value is given in the contract being illustrated and shown in close proximity to the corresponding value available upon surrender; 12. The value available upon surrender shall be identified by the name this value is given in the contract being illustrated and shall be the amount available to the contract owner in a lump sum after deduction of surrender charges, bonus forfeitures, contract loans, contract loan interest, and application of any market value adjustment, as applicable; 13. Illustrations may show contract benefits and values in graphic or chart form in addition to the tabular form; 14. Any illustration of non-guaranteed elements shall be accompanied by a statement indicating that: a. The benefits and values are not guaranteed; b. The assumptions on which they are based are subject to change by the insurer; and c. Actual results may be higher or lower; 15. Illustrations based on non-guaranteed credited interest and non-guaranteed annuity income rates shall contain equally prominent comparisons to guaranteed credited interest and guaranteed annuity income rates, including any guaranteed and non-guaranteed participation rates, caps, or spreads for fixed indexed annuities; 16. The annuity income rate illustrated shall not be greater than the current annuity income rate unless the contract guarantees are in fact more favorable; 17. Illustrations shall be concise and easy to read; 18. Key terms shall be defined and then used consistently throughout the illustration; 19. Illustrations shall not depict values beyond the maximum annuitization age or date; 20. Annuitization benefits shall be based on contract values that reflect surrender charges or any other adjustments, if applicable; and 21. Illustrations shall show both annuity income rates per $1,000.00 and the dollar amounts of the periodic income payable. 22. For participating immediate and deferred income annuities: a. Illustrations may not assume any future improvement in the applicable dividend scale (or scales, if more than one dividend scale applies, such as for a flexible premium annuity); b. Illustrations must reflect the equitable apportionment of dividends, whether performance meets, exceeds, or falls short of expectations; c. If the dividend scale is based on a portfolio rate method, the portfolio rate underlying the illustrated dividend scale shall not be assumed to increase; d. If the dividend scale is based on an investment cohort method, the illustrated dividend scale should assume that reinvestment rates grade to long-term interest rates, subject to the following conditions: i. Any assumptions as to future investment performance in the dividend formula must be consistent with assumptions that are reflected in the marketplace within the normal range of analyst forecasts and investor behavior; these assumptions may not be changed arbitrarily, notwithstanding changes in markets or economic conditions, and must be consistent with assumptions that the issuer uses with respect to other lines of business; and ii. The illustrated dividend scale should assume that reinvestment rates grade to long-term interest rates, based on U.S. Treasury bonds. For the purposes of this grading, the assumed long- term rates should not exceed the rates calculated using the formula in subsection (G)(22)(d)(iii), based on the time to maturity or reinvestment (the “Tenor”) of the investments supporting the cohort of polices. iii. Maximum long-term interest rates should be calculated for tenors of three months (or less), five years, 10 years, and 20 years (or more), using U.S. Treasury rates. For each tenor, the maximum long-term interest rate will vary over time, based on historical interest rates as they emerge. The formula for the maximum long- term interest rate is the average of the median bond rate over the last 600 months and the average bond rate over the last 120 months, rounded to the nearest quarter of one percent (0.25%). iv. The maximum long-term interest rate for a tenor should be recalculated once per year, in January, using historical rates as of December 31 of the calendar year two years prior to the calendar year of the calculation date. The historical rate for each month is the rate reported for the last business day of the month. v. Grading to the maximum long-term interest rates should take place over no less than 20 years from issue if U.S. Treasury rates as of the illustration date are below the long-term rates, or, no more than 20 years from issue if U.S. Treasury rates as of the illustration date are above the long-term rates. vi. When the 10-year U.S. Treasury rate is less than the 10-year maximum long-term interest rate, an additional illustrated dividend scale should be presented. This additional illustrated dividend scale shall assume that reinvestment U.S. Treasury rates do not exceed the initial investment U.S. Treasury rates and illustrate dividends no less than half of the dividends illustrated under the current dividend scales. If the assumption that reinvestment U.S. Treasury rates do not exceed the initial investment U.S. Treasury rates conflicts with the illustration, i.e. half of the current dividends are greater than would be permitted by the assumption, then the reinvestment U.S. Treasury rates should equal the initial investment U.S. Treasury rates. vii. The illustration should include a disclosure that is substantially similar to the following: The illustrated current dividend scale is based on interest rates that are assumed to gradually [increase/decrease] from current rates to long- term interest rates, over a period of [20] years. By regulation, the long-term assumed interest rates cannot not and do not exceed the rates listed in column (c) of the table below. viii. If the illustration contains an additional dividend scale pursuant to subsection (G)(22)(d)(vi), then the illustration should also include a disclosure that is substantially similar to the following: The additional illustrated dividend scale is based on interest rates that are assumed not to increase and do not exceed the interest rates in column (b) of the table below. Column A Column B Column C Current Interest Rate Long Term Tenor Mean Reversed Treasury Treasury Rate as of 12/31/2016 Rate 3 Month (or less) 0.51% 3.00% 5 Year 1.93% 4.50% 10 Year 2.45% 5.00% 20 Years (or more) 3.06% 5.50% H. An annuity illustration shall include a narrative summary that includes all the following unless provided at the same time in a disclosure statement: 1. A brief description of any contract features, riders or options, guaranteed and/or non-guaranteed, shown in the basic illustration and the impact they may have on the benefits and values of the contract; 2. A brief description of any other optional benefits or features that are selected, but not shown in the illustration and the impact they have on the benefits and values of the contract; 3. Identification and a brief definition of column headings and key terms used in the illustration; 4. A statement containing in substance the following: a. For other than fixed indexed annuities: This illustration assumes the annuity’s current non- guaranteed elements will not change. It is likely that they will change and actual values will be higher or lower than those in this illustration but will not be less than the minimum guarantees. The values in this illustration are not guarantees or even estimates of the amounts you can expect from your annuity. Please review the entire Disclosure Document and Buyer’s Guide provided with your Annuity Contract for more detailed information; b. For fixed indexed annuities: This illustration assumes the index will repeat historical performance and that the annuity’s current non-guaranteed elements, such as caps, spreads, participation rates or other interest crediting adjustments, will not change. It is likely that the index will not repeat historical performance, the non-guaranteed elements will change, and actual values will be higher or lower than those in this illustration but will not be less than the minimum guarantees. The values in this illustration are not guarantees or even estimates of the amounts you can expect from your annuity. Please review the entire Disclosure Document and Buyer’s Guide provided with your Annuity Contract for more detailed information; 5. Additional explanations as follows: a. Minimum guarantees shall be clearly explained; b. The effect on contract values of contract surrender prior to maturity shall be explained; c. Any conditions on the payment of bonuses shall be explained; d. For annuities sold as an IRA, qualified plan or in another arrangement subject to the required minimum distribution (RMD) requirements of the Internal Revenue Code, the effect of RMDs on the contract values shall be explained; e. For annuities with recurring surrender charge schedules, a clear and concise explanation of what circumstances will cause the surrender charge to recur; and f. A brief description of the types of annuity income options available shall be explained, including: i. The earliest or only maturity date for annuitization (as the term is defined in the contract); ii. For contracts with an optional maturity date, the periodic income amount for at least one of the annuity income options available based on the guaranteed rates in the contract, at the later of age 70 or 10 years after issue, but in no case later than the maximum annuitization age or date in the contract; iii. For contracts with a fixed maturity date, the periodic income amount for at least one of the annuity income options available, based on the guaranteed rates in the contract at the fixed maturity date; and iv. The periodic income amount based on the currently available periodic income rates for the annuity income option in subsection (H)(5)(f)(ii) or in subsection (H)(5)(f)(iii), if desired. I. Following the narrative summary, an illustration shall include a numeric summary which shall include at minimum, numeric values at the following durations: 1. The first 10 contract years or the surrender charge period if longer than 10 years, including any renewal surrender charge period or periods; 2. Every tenth contact year up to the later of 30 years or age 70; and 3. Required annuitization age or required annuitization date. J. If the annuity contains a market value adjustment (“MVA”), the following provisions apply to the illustration: 1. The MVA shall be referred to as such throughout the illustration; 2. The narrative shall include an explanation, in simple terms, of the potential effect of the MVA on the value available upon surrender; 3. The narrative shall include an explanation, in simple terms, of the potential effect of the MVA on the death benefit; 4. A statement, containing in substance the following, shall be included: When you make a withdrawal, the amount you receive may be increased or decreased by a Market Value Adjustment (MVA). If the interest rates on which the MVA is based go up after you buy your annuity, the MVA likely will decrease the amount you receive. If interest rates go down, the MVA will likely increase the amount you receive. 5. Illustrations shall describe both the upside and the downside aspects of the contract features relating to the MVA; 6. The illustrative effect of the MVA shall be shown under at least one positive and one negative scenario. This demonstration shall appear on a separate page and be clearly labeled that it is information demonstrating the potential impact of a MVA; 7. Actual MVA floors and ceilings as listed in the contract shall be illustrated; and 8. If the MVA has significant characteristics not addressed by subsections (J)(1) through (J)(6), the effect of such characteristics shall be shown in the illustration. K. A narrative summary for a fixed indexed annuity illustration also shall include the following unless provided at the same time as the disclosure statement: 1. An explanation, in simple terms, of the elements used to determine the index-based interest, including but not limited to, the following elements: a. The index(es) which will be used to determine the index-based interest; b. The Indexing Method; c. The Index Term; d. The participation rate, if applicable; e. The cap, if applicable; and f. The spread, if applicable; 2. The narrative shall include an explanation, in simple terms, of how index-based interest is credited in the indexed annuity: 3. The narrative shall include a brief description of the frequency with which the company can re-set the elements used to determine the index-based credits, including the participation rate, the cap, and the spread, if applicable; and 4. If the product allows the contract holder to make allocations to a declared-rate segment, then the narrative shall include a brief description of: a. Any options to make allocations to a declared-rate segment, both for new premiums and for transfers from the index-based segments; and b. Differences in guarantees applicable to the declared- rate segment and the index-based segments. L. A numeric summary for a fixed indexed annuity illustration shall include, at a minimum, the following elements: 1. The assumed growth rate of the index in accordance with subsection (G)(9); 2. The assumed values for the participation rate, cap and spread, if applicable; and 3. The assumed allocation between index-based segments and the declared-rate segment, if applicable, in accordance with subsection (G)(9). M. If the contract is issued other than as applied for, a revised illustration conforming to the contract as issued shall be sent with the contract, except that non-substantive changes, including but not limited to, changes in the amount of expected initial or additional premiums and any changes in amounts of exchanges pursuant to Section 1053 of the Internal Revenue Code, rollovers and transfers, which do not alter the key benefits and features of the annuity as applied for will not require a revised illustration unless requested by the applicant. N. Annuity Illustration Examples. Illustrations A through C are examples only and do not reflect specific characteristics of any actual product for sale by any company.