With the stated purpose of protecting consumers and fostering consumer education, in 1996 the National Association of Insurance Commissioners (NAIC) adopted a model regulation pertaining to life insurance illustrations. This is the NAIC�s first attempt to set standards for policy illustrations. By January 1, 1997, two states (North Carolina and Utah) had already adopted the model regulation, and additional 13 states (California, Colorado, Delaware, Iowa, Louisiana, Nebraska, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, South Dakota) adopted some form of the regulation that became effective in 1997. Alabama, Illinois, Kansas, Maryland, Nevada, New York, Washington, and Wisconsin have illustration regulations that become effective in 1998, and there are 5 states where steps have been taken toward adoption.

The new model regulation is already having an impact on illustrations in all states because many life insurance companies are moving toward using the same illustration model in every state. Thus they do not need different software systems for each state. They are making all their illustrations conform to the most stringent state�s requirements. Texas presents a challenge since their regulation is not compatible with the NAIC model being adopted by the other states.

The new regulation does not apply to variable life, credit life, or life insurance with a face amount of less than $10,000. It does not apply to either individual or group annuity contracts. The new regulation applies to all nonvariable group and individual life insurance policies and certificates for more than $10,000 of death benefit.

The regulation requires the insurance company to declare to the state insurance department for each policy form whether or not it intends to use illustrations to market that form of coverage. A copy of each illustration the insurer intends to use must be forwarded to the state insurance department. Each illustration used in the sale of a life insurance policy covered by the new regulation must be clearly labeled "life insurance illustration" and must include the following:

1. name of the insurance company

2. name and business address of the insurer�s agent

3. name, age, and sex of the proposed insured

4. the underwriting or rating classification upon which the illustration is based

5. the generic name of the policy (e.g., whole life, universal life, etc.)

6. the initial death benefit amount

7. the dividend option election or application of nonguaranteed elements if applicable

The NAIC Model regulation prohibits insurers and their agents from the following:

1. representing the policy as anything other than a life insurance policy

2. using or describing nonguaranteed elements in a manner that is misleading or has the capacity or tendency to mislead

3. stating or implying that the payment or amount of nonguaranteed elements is guaranteed

4. using an illustration that does not comply with the illustration regulation

5. using an illustration that is more favorable to the policyowner than the illustration based on the illustrated scale of the insurer

6. providing an applicant with an incomplete illustration

7. representing in any way that premium payments will not be required for each year of the policy in order to maintain the illustrated death benefits, unless that is the fact

8. using the term "vanish," "vanishing premium," or a similar term that implies the policy becomes paid up, to describe a plan for using nonguaranteed elements to pay a portion of future premiums

9. using an illustration that is not "self-supporting"

The NAIC model illustration regulation specifies that all illustrations must be dated as of the date prepared. All pages must be marked to indicate both the individual page number and the total number of pages in the illustration (for example, "page 3 of 7"). The illustration must clearly indicate which elements are guaranteed and which are nonguaranteed. Any amount available upon surrender shall be the amount after deduction of surrender charges. Items presented in illustrations can be in the form of charts, graphs, or tabular values.

Each illustration must be accompanied by a narrative summary that describes the policy, premiums, and features and defines column headings used in the illustration. The summary should also state that actual results may be more or less favorable than those shown in the illustration.

The regulation states that illustrations for universal life policies must comply with the regulation requirements and additionally that the insurance company must issue annual reports to policyowners after the policy is issued. These annual reports must specify the beginning and ending dates for the reporting period.

The content of the annual reports is specified in the NAIC model regulation:

The regulation further stipulates that policyowners have the right to request an in-force illustration annually without charge. The insurer must provide information regarding where and how to direct such requests and must supply a current illustration within 30 days of the request. Such illustrations are to be based on the insurer�s present illustrated scale.

Each insurer�s board of directors must appoint at least one illustration actuary, who will certify that the illustrations are in compliance with the illustration regulation and are insurer-authorized. The regulation states the qualifications of an illustration actuary, including membership in good standing of the American Academy of Actuaries.

The illustration actuary must annually certify the method used to allocate overhead and expenses for all illustrations and file such certification with the insurance commissioner and with the insurer�s board of directions. Further, the illustration actuary is required to report any mistakes found in previous certifications to both the commissioner and the board of directors. The insurance commissioner must also be notified of any change in the illustration actuary and the reasons for the change.

The model regulation sets forth limits on the methodology for calculating illustrations. These limits are intended to curb some of the overly optimistic projections that a few insurers were utilizing in recent years in the absence of any standards or constraints. Most of the new constraints are contained in the definitions of currently payable scale, disciplined current scale, and illustrated scale.

These definitions are as follows: