Making Changes to Interest Rates for Life Insurance Nonforfeiture Values

The Insurance Compact Office would like to remind filing company actuaries of Filing Information Notice (FIN) 2020-1 published on November 19, 2020. This FIN pertains to filing submissions to reflect changes in interest rates for life insurance nonforfeiture values. 

The NAIC Valuation Manual includes a definition of the nonforfeiture interest rate for life insurance in VM-02 Section 3: 

The nonforfeiture interest rate for any life insurance policy issued in a particular calendar year beginning on and after the operative date of the Valuation Manual shall be equal to 125% of the calendar year statutory valuation interest rate defined for the NPR in the Valuation Manual for a life insurance policy with nonforfeiture values, whether or not such sections apply to such policy for valuation purposes, rounded to the nearer one-quarter of 1%, provided, however, that the nonforfeiture interest rate shall not be less than the applicable interest rate prescribed to meet the definition of life insurance in the Cash Value Accumulation Test (CVAT) under Section 7702 of the U.S. Internal Revenue Code. 

Note that the 2021 Edition floors the nonforfeiture rate at the Section 7702 CVAT rate. Prior to the 2021 Edition, the floor to the nonforfeiture rate was fixed at 4 percent.

At the end of December 2020, Congress enacted the Consolidated Appropriations Act, 2021, which include revisions to Section 7702 to tie the rates to either a floating rate prescribed by the NAIC's Standard Valuation Law or a floating rate based on the average applicable Federal mid-term rates over a 60-month period.  The CVAT interest rate was previously set by statute at 4 percent when the requirements were put in place in 1984.  The changes to Section 7702 provide a transitional rule that sets the CVAT interest rate at 2% for 2021 issues. After the transitional period, the floating rate methodology applies. Please note companies may defer the implementation of an interest rate revision resulting from a change to the nonforfeiture interest rate for one year following a change to the maximum valuation interest rate as stated in Section 5c.H(1) of the Standard Nonforfeiture Law for Life Insurance (NAIC Model #808).

Filers wishing to update their interest rates in life insurance products should consult FIN 2020-1 for guidance as the FIN outlines the process and procedures associated with submitting new product filings or updating previously approved products to change the interest rate, depending on how the rate was expressed in a previously approved filing. The FINs are published on the Compact’s website on the Insurer Resources page under Filing Reference Materials, and the home page in the Links section. It is important to note that FIN 2020-1 does not pertain to annuity nonforfeiture rates or NAIC Model #805.

If you have any questions regarding this Weekly Tip or submitting a filing, please reach out to the Insurance Compact Office.

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