Outline headings covered: Required provisions (3203); Beneficiaries; Settlement options; Nonforfeiture options; Policy loan and withdrawal options; Dividend options; Disability riders; Accelerated (living) benefit provisions/riders (3230); Riders covering additional insureds; Riders affecting the death benefit amount. Weight: 10 percent of the 150 items, the heaviest block on the exam.
This chapter is where the New York Insurance Law is read almost line by line; the questions are drawn from the printed sections (3203, 3204, 3230). Where the national idea and the New York rule differ, the answer is the New York rule. Chapter 3 owns replacement, illustrations and suitability, and Chapter 7 the federal tax treatment.
Section 3203 applies to individual life policies delivered or issued for delivery in New York, not to group life insurance (Ins. Law 3203(f)). A policy must contain each required provision "in substance," or a provision the Superintendent of Financial Services considers more favorable to policyholders. A provision that cannot apply to a single premium, nonparticipating or term policy is omitted to that extent, except the right-to-examine clause, which is always required (Ins. Law 3203(f)).
5.1 Ownership and Assignment (Required Provisions - Ownership, Assignment)
The owner holds the contract rights: to name and change beneficiaries (unless irrevocable), borrow, surrender, assign, elect options, and receive dividends. The insured is the person whose life is covered; the beneficiary is paid at death. One person can fill all three roles.
In New York - minors as owners
A minor above the age of fourteen years and six months is competent to contract for, own, and exercise all rights under a policy on the minor's own life or on the life of a person in whom the minor has an insurable interest. The beneficiary may be only the minor or the minor's parent, spouse, brother, sister, child or grandparent (Ins. Law 3207(a)).
An assignment transfers some or all of the owner's rights to an assignee. An absolute assignment passes all ownership rights permanently (a gift, a sale, a transfer to a trust). A collateral assignment passes rights only up to a debt, usually a loan; the balance stays with the owner or beneficiary, and the lender is paid first. The insurer is not bound until it has notice.
In New York - assignee notice and fraudulent transfers
An assignee may ask the insurer, in writing mailed to the home office before any default, for notice of non-payment of premium. After default, the assignee's right to the cash surrender value or other nonforfeiture benefit continues as it stood at default until ten days after the insurer mails the notice to the assignee (Ins. Law 3211(e)). Every assignment or change of beneficiary is valid except one made with actual intent to hinder, delay or defraud creditors; the insurer is discharged by paying under the policy unless it received written notice of the creditor's claim first (Ins. Law 3212(e)).
An irrevocable beneficiary's written consent is needed for an assignment or a loan (Section 5.10).
5.2 Entire Contract and Statements of the Applicant (Required Provisions - Entire Contract; Statements of the Applicant)
The policy is the contract. A New York life policy must state that the policy, together with the application if a copy is attached when the policy is issued, is the entire contract (Ins. Law 3203(a)(4)). Section 3204 builds the rule into every life, accident and health policy and annuity delivered in the state:
- nothing may be incorporated by reference to another writing unless a copy is endorsed on or attached to the policy when issued;
- an application is not admissible in evidence unless a true copy was attached to the policy when issued;
- the contract cannot be modified, and no right or requirement waived, except in a writing signed by a person the insurer specifies in the policy (Ins. Law 3204(a)).
No oral promise changes the contract, and the agent cannot change it unless the policy names that person. A rate or premium table on file with the Superintendent need not be attached (Ins. Law 3204(b)).
Representations, not warranties. All statements made by or by the authority of the applicant for the issuance, reinstatement or renewal of a policy are representations and not warranties (Ins. Law 3204(c)). A warranty must be literally true or the contract fails; a representation need only be "substantially true," and the insurer must show the misstatement was material (Chapter 2).
In New York - alterations of the application
No one except the applicant may insert in or alter a written application without the applicant's written consent. The insurer may make insertions for administrative purposes only, and only in a way that clearly shows they are not the applicant's (Ins. Law 3204(d)).
A policy allowing changes by application (a death benefit increase, a rider, an option election) may provide that the accepted application or notice becomes part of the contract once a copy is mailed or delivered to the owner (Ins. Law 3203(a)(4)). If the owner or beneficiary writes for a copy of a reinstatement, renewal or change application, the insurer must deliver or mail it within fifteen days or lose the right to use it as evidence (Ins. Law 3204(e)). A waiver of section 3204 is void (Ins. Law 3204(f)).
5.3 Payment of Premiums and the Grace Period (Required Provisions - Payment of Premiums; Grace Period)
After the first premium, the grace period keeps coverage in force while the owner catches up (conditional receipts: Chapter 3).
In New York - two grace periods
Policies in which the amount and frequency of premiums may vary (universal life and similar flexible premium policies): a 61-day grace period that begins on the day the insurer determines that the net cash surrender value is not enough to pay the total charges needed to keep the policy in force for one month, within which the owner may pay enough premium to keep the policy in force for three months from the date of the shortfall. All other policies: a 31-day grace period "or of one month following any subsequent premium due date." During the grace period the policy stays in full force (Ins. Law 3203(a)(1)).
If the insured dies in the grace period, the insurer may deduct the unpaid premium to the end of the policy month of death; if death occurs in a paid period, the insurer refunds premium paid beyond the end of that policy month, unless waived. Not applicable to single premium or paid-up policies (Ins. Law 3203(a)(2)).
The grace period is not the whole story in New York. A life policy, and a noncancellable disability policy, may not lapse for non-payment of a premium, installment or policy-loan interest in less than one year after the default unless the insurer mailed a notice at least fifteen and not more than forty-five days before the due date. For flexible premium policies the notice comes no earlier than, and within thirty days after, the day the insurer determines the net cash surrender value is not enough to pay the charges (Ins. Law 3211(a)). The notice goes to the owner's last known address or another person designated in writing and states the amount, the due date, and that the policy lapses unless paid by the due date or within the grace period, except as to any cash value or nonforfeiture benefit (Ins. Law 3211(b)). A sworn statement of mailing is presumptive evidence of notice (Ins. Law 3211(c)).
Three more points from section 3211:
- No action to recover on a life policy that lapsed for non-payment (other than for the cash value or nonforfeiture benefit) may be brought more than two years after the default (Ins. Law 3211(d)).
- The notice rule does not apply to group policies, and policies on which premiums are payable monthly or more often are exempt if the insurer elects to mail, within six months after termination, a notice of the type and amount of any automatic nonforfeiture benefit in force (Ins. Law 3211(f)).
- Each year the insurer must notify the owner of a policy with cash surrender value that more information, including an updated illustration, is available on written request (Ins. Law 3211(g)).
5.4 Reinstatement (Required Provisions - Reinstatement)
Reinstatement restores a lapsed policy without issuing a new one.
In New York - three years, not five
The policy must be reinstated at any time within three years from the date of default, unless the cash surrender value has been exhausted or the period of extended insurance has expired, if the policyholder (1) applies, (2) provides evidence of insurability, including good health, satisfactory to the insurer, (3) pays all overdue premiums with interest at a rate not exceeding six percent per annum compounded annually, and (4) pays or reinstates any other policy indebtedness with interest at a rate not exceeding the applicable policy loan rate. The provision is required only if the policy provides for termination or lapse on default in a regularly scheduled premium (Ins. Law 3203(a)(10)).
There is no waiting period before applying and no right to reinstate on request: the insurer decides whether the evidence of insurability is satisfactory.
A reinstated policy is incontestable after the same period following reinstatement and with the conditions and exceptions provided in the policy (Ins. Law 3210). A statement in the reinstatement application is a representation, and the owner or beneficiary may demand a copy of it (Ins. Law 3204(c), (e)).
5.5 Incontestability (Required Provisions - Incontestability)
The incontestable clause stops the insurer from rescinding for an application misstatement after a fixed time.
In New York - two years from the date of issue
The policy must provide that it is incontestable after being in force during the life of the insured for a period of two years from its date of issue. If the policy allows an increase in the death benefit or another change on application and evidence of insurability, each increase or change is incontestable after two years from its effective date, with respect to that increase or change. The exceptions are nonpayment of premiums and violation of policy conditions relating to service in the armed forces. At the insurer's option, benefits for total and permanent disability and additional benefits for accidental death may also be excepted (Ins. Law 3203(a)(3)).
Four points follow from the wording.
- "During the life of the insured." The two years run only while the insured is alive. If the insured dies in year one, the policy is still contestable.
- Date of issue, not the date of delivery or the effective date. In a backdated policy the clock starts on the issue date written in the policy.
- Not a license to pay everything. The clause does not revive a lapsed policy or cover a claim excluded by the contract's own terms, such as a permitted aviation exclusion (Section 5.7); an exclusion is not a contest of validity.
- Each increase starts its own clock. A $100,000 policy increased to $150,000 is incontestable as to the extra $50,000 two years after the increase.
A disability benefit in a life policy or deferred annuity that is not excepted from the two-year clause must be incontestable only after three years, in force during the insured's life and without total disability (Ins. Law 3215(a)(5)). Chapter 11 teaches the time limit on certain defenses in individual health policies.
5.6 Misstatement of Age (Required Provisions - Misstatement of Age)
If the age of the insured has been misstated, any amount payable or benefit accruing under the policy is "such as the premium would have purchased at the correct age" (Ins. Law 3203(a)(5)). The policy is not voided, and the clause is not limited to the contestable period. An insured understated as younger paid too little, so the benefit is reduced to what the premium paid would have bought at the true age; an insured overstated as older paid too much, so the benefit is increased.
Worked arithmetic (illustrative figures). A buyer from Albany applies at stated age 40 for a $200,000 policy at an annual premium of $2,000. At the true age of 45 the premium for $200,000 would have been $2,500. The premium paid buys 2,000 / 2,500 = 80 percent of $200,000, so the death benefit is $160,000. The same method is used for annuities, with an underpayment or overpayment, with interest of no more than six percent, credited or charged against the current or next payment (Ins. Law 3219(a)(5)).