Section 500.849a. Variable life nonforfeiture values.

Rule 9a. (1) Minimum cash surrender values for variable life insurance policies shall be determined separately   for  the  basic  policy   and  any benefits and riders for which premiums are paid separately. The methods pertain to a basic policy and any benefits and riders for which   premiums are not paid separately.

(2)   The method of computation of minimum cash surrender values for variable life policies shall be determined using the retrospective method, the prospective method, or the maximum charge method.

(a)    When variable life policy funds are solely in 1 or more separate accounts, the retrospective method or the maximum charge  method   may  be used to compute minimum cash surrender values.

(b)   In case of  a  combination  general  account  and  separate  account product providing for 1 basic amount of insurance but with the policy value allocated among the general account and 1 or   more   separate     accounts  and with mortality charges applicable to the

difference between the death benefit and   the  policy  value,  the   applicable  cash  surrender value procedures used may be either the maximum charge  method   or  the retrospective method. The method used shall be applicable to both the general account and the separate account portions and all of the following provisions shall apply:

(i)   The policy shall specify a guaranteed rate of interest for the portion of the fund accumulated in the general account.

(ii)       Additions or  amounts  derived  from  more  favorable  interest, mortality, and expense than those guaranteed in the policy on the  general account fund and credited within 12 months before surrender may be subject to forfeiture upon surrender.

(iii)    At least once each year the insured has the option to transfer all separate account funds to the general account and apply his or her cash surrender value to purchase a guaranteed fixed paid-up benefit.

(iv)   Any amount of paid-up whole life insurance  provided  under  paragraph

(iii) of this subdivision shall be at least as great as that  computed using the mortality table on which the maximum mortality charges have been calculated and the interest rate guaranteed in the policy.  Any   period   of extended term insurance provided under paragraph

(iii) of this subdivision shall be at least as long as that using an extended term insurance mortality table appropriate  to  the  mortality  table   for  the  maximum mortality charges and the interest rate guaranteed in the policy.

(v) The annual report shall note the availability of the option  under paragraph (iii) of this subdivision.

(3)   As used in this rule:

(a)   "Accumulation rate" means the net investment return or any interest credits applied towards the policy value.

(b)    "Cash surrender value" means the net cash surrender value plus any amounts outstanding as policy loans.

(c)   "Net cash surrender value" means the maximum amount payable to the policy owner upon surrender.

(d)  "Policy value" means the amount to which separately identified interest credits or investment return and mortality, expense, or other charges are made under a variable life insurance policy.

(e)    "Valuation rate" means the higher of the assumed investment rate (AIR) or guaranteed interest included in the policy, if any, otherwise the highest valuation interest rate allowed under  the  standard   nonforfeiture law.

(4)   All of the following provisions apply to use   of  the   retrospective method:

(a)   The minimum cash surrender value before adjustment for indebtedness and dividend credits, available on a valuation date shall be equal to the value using the accumulation rate through that date of the premiums paid minus the accumulation through that date of all of the following:

(i)   The benefit charges.

(ii)    The averaged administrative expense charges for the first policy year and any insurance increase years.

(iii)   Actual administrative expense charges for other years.

(iv)    Initial and additional acquisition expense charges not exceeding the initial or additional expense allowances respectively.

(v)    Any service charges  actually  made,  excluding  charges  for   cash surrender or election of a paid-up nonforfeiture benefit.

(vi)   Any deductions made for partial withdrawals.

(vii)    All accumulations being at the accumulation rate at which changes in policy values have been made unconditionally to the policy or have been made conditionally, but for which the conditions have since been met, and minus any unamortized, unused initial and additional expense allowance.

(b)   Accumulation for the premiums and for all  charges  referred  to   in subdivision (a)(i) to  (vi)  of  this  subrule   shall  be  based  on   the accumulation rate for the applicable account or accounts from and to such dates as are consistent with the manner in which such accumulation  rate is credited in determining the policy value.

(c)  The benefit charges shall include the charges made for mortality and any charges made for riders or supplementary benefits for which premiums are not paid separately. If benefit charges are substantially level by duration and develop low or no cash values, then the commissioner shall have the right to require higher cash values unless the insurer provides adequate justification that the cash values are appropriate in relation to the policy's other characteristics.

(d)    The administrative   expense charges shall include  all  of  the following:

(i)   Charges per premium payment.

(ii)   Charges per dollar of premium paid.

(iii)   Periodic charges per thousand dollars of insurance.

(iv)   Periodic per policy charges.

(v)   Any other charges permitted by the policy to be imposed without regard to the policyowner's request for services.

(e)    The averaged administrative expense charges for any year shall be those which would have been imposed in the year if the charge  rate   or rates for each transaction or period within the year had been equal to the arithmetic average of the corresponding charge rates   which  the  policy states will be imposed in policy years 2 through  20  in   determining the policy value.

(f)   The initial acquisition expense charges shall be the excess of the expense charges, other than service charges, actually made in the first policy year over the averaged administrative  expense   charges  for  that year. Additional acquisition expense charges shall be the excess of the expense charges, other than service charges, actually made in an insurance increase year over the averaged administrative expense charges for that year. An insurance increase year shall be the year beginning on the date of increase in the amount of insurance by policyowner request  or   by the terms of the policy.

(g)    Service charges shall include charges permitted by the policy to be imposed as a result of a policyowner's request for  a  service  by  the insurer, such as the furnishing of future benefit   illustrations   or   of special transactions.

(h)   The initial expense allowance shall be  the   allowance  provided  by items (ii), (iii), and (iv) of paragraph 1 of subsection (5), or by items (ii) and (iii) of paragraph 9 of subsection (5), as applicable, of section 4060 of Act No. 218  of   the  Public  Acts  of   1956,  as amended, being S500.4060(5)(1)(ii),(iii), and (iv) or (5)(9)(ii) and (iii) of the Michigan Compiled Laws, for a fixed premium, fixed  benefit  endowment policy with a face amount equal to the initial face amount of the variable life insurance policy, with level premiums paid annually until  the  highest attained age at which a premium  may be  paid   under   the    variable

life insurance policy and maturing on the latest maturity date permitted under the policy, if any, otherwise at the highest  age  in  the  valuation mortality table. The unused initial expense allowance shall be the excess, if any, of the initial allowance over the initial acquisition   expense charge as defined in this subrule.

(i)   If the amount of insurance is subsequently increased upon request  of the policyowner or by the terms of the policy, an additional expense allowance and an unused additional expense allowance shall be determined on a basis consistent with subdivision (h) of this subrule and with paragraph 13 of subsection (5) of section 4060 of Act  No.   218  of  the Public Acts of 1956, as amended, being S500.4060(5)(13) of the Michigan Compiled Laws, using the face  amount and the  latest  maturity  date permitted at that time under the policy.

(j)   The unamortized, unused initial expense allowance during the  policy year beginning on the policy anniversary at age x+t, where "x" is the issue age, shall be the unused initial expense allowance multiplied by x+t/ x where " x+t" and " x " are present value of an annuity of 1 per year payable on policy anniversaries beginning at ages x+t and x, respectively, and continuing until the highest attained age at which a premium may be paid under the policy, both on the mortality guaranteed in the policy and the valuation rate for the policy. An  unamortized,  unused additional expense  allowance   shall  be  the  unused additional expense allowance multiplied by a similar ratio of annuities, with x replaced by an annuity beginning on the date as of which the  additional   expense allowance was determined.

(5)   All of the following provisions apply to the use of the  prospective method:

(a)   The minimum cash surrender value before adjustment for indebtedness and dividend credits which is available on a date as of which  interest  is credited to the policy shall be equal to (A)-(B)-(C)-(D). "A"  means  the present value of all future benefits.   "B"  means   the present value of future adjusted premiums. The adjusted premiums are  calculated   as described in paragraphs 1 to 6 and 9 of subsection (5), as applicable, of section 4060 of Act No. 218 of the Public Acts of 1956, as amended, being S500.4060(5)(1) to (6) and (9) of the Michigan Compiled Laws. If paragraph 9 of subsection (5) is applicable, the nonforfeiture net level premium is equal to the quantity PVFB/ x , where "PVFB" is the present value of all benefits at issue assuming future premiums are paid by the policy owner, assuming all guarantees  contained  in   the  policy  or  declared   by   the insurer, and using the valuation rate. x  is   the  present  value   of    an annuity of 1 per year payable on policy anniversaries beginning at age x and continuing until the highest attained age at which a premium  may  be paid under the policy. "C" means the present value of any quantities analogous to the nonforfeiture net level premium which arise because of guarantees declared by the insurer after the issue date of the  policy.  x shall be replaced by an annuity beginning  on   the  date the declaration became effective and payable until the end of the period covered by the declaration. The types of quantities included are increased current interest rate credits guaranteed for a future period, decreased current mortality rate charges guaranteed for  a future period, or decreased current expense charges guaranteed for a future period. "D" means the  sum of any quantities analogous to  "B"   which  arise  because  of  structural changes in the policy. Structural changes are those changes which are separate from the automatic workings of the policy. Such  structural changes usually would be initiated by the policy owner and include changes in the guaranteed benefits, changes in latest maturity   date, or changes  in allowable premium payment period.

(b)   Future benefits are determined by both of the following:

(i)   Projecting the policy value, taking into account future premiums, if any, and using the guaranteed interest rate, if any; otherwise, the lesser of the air, if any, or the highest state- approved  nonforfeiture  interest rate, and  using   the  mortality,   expense   deductions,    and other    provisions contained in the policy or declared by the insurer.

(ii)   Taking into account any benefits guaranteed in  the  policy   or  by declaration which do not depend on the policy value.

(c)   All present values shall be determined using an interest rate or rates specified by section 4060 of Act No. 218 of the Public Acts of 1956, as amended, being S500.4060 of the Michigan Compiled Laws, for policies issued in the same year, and the mortality rates specified by section 4060 of Act No. 218 of the Public Acts of 1956, as amended, for policies issued in the same year or contained in such other table as may be approved by the commissioner for this purpose.

(6)   All of the following provisions apply to the maximum charge method:

(a)  As used in this subrule:

(i)    "Acquisition and other charges" means charges  deducted   from  gross premiums before they are credited to policy value or made  to   the   policy value. They may be expressed as a percentage of premium or a dollar amount per $1,000.00 of insurance or a dollar amount per premium payment or a  per policy charge other than the administrative charge. They  do not include charges made as a reduction in investment return. These charges may vary by premium size, policy size, and policy year.

(ii)   "Administrative charge" means a per policy charge made regularly  to the policy value or deducted from premiums on scheduled  premium  policies for the cost of administration. This charge shall not be more than $5.00 per month in 1986. In subsequent years, the limit for any  new  or   in-force policy shall be the product of $5.00 and the ratio, not to   be   more   than

2.00 of the consumer  price   index  for  all  urban   households  for   the September preceding the year for which the determination is being made to the consumer price index for September, 1985. The commissioner may allow a higher charge upon an insurer demonstrating justification.

(iii)    "Benefit charges made to the policy value"   means  the   mortality charges made for life insurance on the insured person or persons and any charge made for riders and supplementary benefits.

(iv)   "Cash surrender value" means the policy value, less any surrender charge, before reduction for outstanding loans or other amounts  due  under the policy.

(v)     "Deferred acquisition and other charges" means acquisition and  other  charges deducted from the policy value after the first policy year.

(vi)    "Excess acquisition and other charges for a face amount increase" means the maximum excess of "A" over "B" based on the assumption that the net level whole life annual premium  for   the  increase  as  defined  in paragraph (x) of this subdivision applies throughout the remaining premium paying period. "A" is the acquisition and other charge for the increase and "B" is the arithmetic average of the corresponding charges which the policy states would be made in the 19 policy years following the increase.

(vii)   "Excess first-year acquisition  and  other  charges"   means  the maximum excess of "A" over "B" based on the assumption that any premium, other than a single premium, payable in the  first  policy  year    is   also payable during the entire premium paying period. "A" is   the   acquisition and other charge made in the first policy year and "B"   is   the   arithmetic

average of the corresponding charges which the policy states would be made in policy years 2 through 20.

(viii)   "Net investment return" means the actual    amount  credited  to

policy value net of  investment   expenses  or  other   charges     made     as     a reduction in investment return.

(ix)   "Net level whole life annual premium at issue" is based on the assumption of level insurance and level annual premium for life, the mortality table rate used to calculate the maximum mortality charges, and an interest rate based on the higher of  4%   or  that specified   in   the policy.

(x)    "Net level whole life annual premium for an increase in the face amount of insurance" shall be determined as of the date of the increase as though such increase were a separate policy under paragraph (ix) of this subdivision. Only increases in the face amount requested  by  the  policy owner and increases in the face  amount  pursuant  to  the  terms   of the policy, such as an option to purchase or a cost-of-living increase, shall give rise to such a premium and the associated excess acquisition and other charges for a face amount increase. Increases for this purpose shall not include increases in face amount resulting from a change in the death benefit option or changes in the death benefit pursuant to policy terms that do not affect the face amount. Increases for this purpose shall be reduced by the amounts of any earlier decreases that have not been offset against an earlier increase. Such decreases shall include a decrease by reason of a partial withdrawal, but not a decrease resulting from a change in the death benefit option.

(xi)    "Policy value" means  gross  premiums  paid,  excluding  separate identified premiums for riders or supplementary benefits  which  are  not credited to policy  value,  plus net investment income, which   may  be positive or negative  and  may  vary  based  on policy  loans,   less   the following as specified in the policy:

(A)   Administrative charges, which may be taken in part from premiums and in part from policy value.

(B)  Acquisition and other charges.

(C)  Deferred acquisition and other charges.

(D)  Benefit charges.

(E)  ) Service charges.

(F)  ) Partial withdrawals.

(G)  ) Partial surrender charges.

(xii)   "Service charges made to the  policy  value"  are  charges  for transactional costs, such as partial withdrawals, reallocations of policy values, and benefit illustrations. Transactional charges shall not be assessed unless specifically  permitted  by  law  or regulation    for transactions made under mandatory policy provisions.

(xiii)   "Surrender charge" is a deferred charge made to the policy value in the event of a full or partial surrender of the policy, reduction in the face amount of insurance or premium, or a lapse.

(b)   If cash surrender values are determined in accordance  with   this subrule, then such cash surrender values shall be  considered   to  have satisfied the requirements for minimum cash surrender values as provided in section 4060 of Act No. 218 of the Public Acts  of  1956, as  amended, being S500.4060 of the Michigan Compiled Laws.

(i)   Acquisition and other charges shall not exceed the sum of  all  of  the following:

(A)  90% of premiums received up to the net level whole life annual premium at issue, regardless of when received.

(B)  ) 10% of all other premiums received.

(C)   90% of the net level whole life annual premium for increases in the face amount of insurance as defined in subdivision (a)(x).

(D)  ) $10.00 per $1,000.00 of initial face amount  in   the  first  policy year.

(E)  ) $1.00 per $1,000.00 of face amount in subsequent policy years.

(F)   $10.00 per $1,000.00 of any increase in the face amount of insurance other than an increase resulting from a change in the death  benefit option. Increases up to the amount of earlier decreases  are included   here but not in subparagraph (c) of this paragraph.

(G)  ) $200.00 per policy in the first year.

(ii)   A surrender charge may be established if the initial surrender charge and the actual acquisition and other charges made in the  first policy year, and the actual acquisition and other charges on premiums up to the net level whole life annual premium if received after the first year, do not exceed the sum of subparagraph (A), subparagraph (B) in the first year, subparagraph (D), and subparagraph (G) of paragraph (i) of this subdivision. Additional surrender charges may  be  established  after  issue in connection with  an  increase  in   the face amount if any  such additional surrender charge and any acquisition and other  charges made  in connection with such increase do not exceed the sum  of  subparagraphs   (C) and (F) of paragraph (i) of this subdivision.

(iii)    A deferred acquisition and other charge may be charged against the policy value in any policy after the first such that the total of all such charges imposed to date plus the surrender charge for that year does not exceed the maximum initial surrender charge. The deferred acquisition and other charge in any 1 year shall not exceed  the   maximum allowable surrender charge for that year. Similar  deferred  acquisition   and   other charges may be imposed with respect to an increase in the face amount.

(iv)   The maximum allowable surrender charge for any year shall be the maximum initial surrender charge multiplied by x+t/ x, where "x" is  the issue age and "t" is the number of years since issue. Similar maximums shall be determined with respect to any additional surrender charges, with  x and t based on the date of increase.

(7)      All of the following   provisions  apply   to  minimum  paid-up nonforfeiture benefits:

(a)   If a variable life insurance policy provides for the optional election of a paid-up nonforfeiture benefit, it shall be such that its present value shall be at least equal to the cash surrender value provided by the policy on the effective date of the election. The present value shall be based on mortality and interest standards at least as favorable to  the policy owner as the mortality and interest basis, if any, specified in  the policy for determining   the  policy value or the mortality and interest standards permitted for paid-up nonforfeiture benefits by section 4060 of Act No. 218 of the Public Acts  of   1956,  as  amended,  being S500.4060  of the Michigan Compiled Laws.   In  place   of  the  paid-up   nonforfeiture benefit, the insurer may substitute, upon a proper request made not later than 60 days after the due date of the premium in  default,  an  actuarially equivalent   alternative  paid-up   nonforfeiture  benefit which provides a greater amount or longer period of death benefits or, if applicable, a greater amount or earlier payment of endowment benefits.

(b)     Any secondary guarantees in a policy shall be taken into consideration when computing minimum paid-up nonforfeiture benefits.

(c)   A charge may be made at the surrender of the policy  if  the   result after the deduction of the charge is  not  less  than   the   minimum   cash surrender value required by this subrule.

(8)   An insurer  may  use   different  methods   to  compute  minimum   cash surrender values for different variable life policies, but for  any  1 policy form, an insurer shall use the same method for all issue  ages.  An insurer may revise its method for new issues.

History: 1979 AC; 1988 AACS.