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Marketing Equity Indexed Annuities: The Good, The Bad & The Ugly

November 22, 1999

I. Introduction

Marketing equity indexed annuities ("EIAs") that are not registered under the federal securities laws presents interesting challenges. The insurance company is faced not only with state regulatory standards for disclosure and market conduct, but also can NOT market the EIA "primarily as an investment." If the product is deemed to have been marketed "primarily as an investment," it might well have crossed the line between insurance products and securities, so that the product would have to be registered with the U.S. Securities and Exchange Commission ("SEC").

As will be discussed in further details during other sessions at this conference, individual state insurance regulators are mandating new rules and procedures for review and approval of EIA products. The Life Disclosure Working Group of the Life Insurance (A) Committee of the National Association of Insurance Commissioners ("NAIC") continues its study of EIAs to determine if separate or additional disclosure regulations are needed with regard to EIAs. On February 6, 1997, the American Academy of Actuaries was asked by the NAIC to undertake a study of equity indexed products with the goal of suggesting new NAIC model regulations and changes to existing models by December 1997. Reportedly, the NAIC is concerned as to whether insurers are adequately explaining to customers the product features (both guaranteed and non-guaranteed) and the risks associated with EIAs. It is possible that the NAIC could adopt a model regulation that could lead to extensive disclosure rules for EIAs.

On the federal level, senior members of the staff of the Securities and Exchange Commission ("SEC") have indicated that they are studying the question of whether or not EIAs are securities. Barry Barbash, Director of the SEC's Division of Investment Management (the division charged with oversight of investment companies and insurance products), acknowledged at the November 1996 ALI-ABA Conference on Life Insurance Company Products, that the answer to this question is fact-intensive, and depends on the features of the EIA (the guarantees provided and the investment risks assumed by the issuing insurer and the EIA owner), and on the marketing of the EIA. Specifically with respect to the marketing, Mr. Barbash noted that the insurance industry faces particular challenges in marketing EIAs. He observed that EIAs are complex, and must be explained thoroughly to prospective purchasers to ensure that EIA owners are not "surprised" by their EIA. Mr. Barbash cautioned that this task was made more difficult by the fact that many EIA purchasers would be relatively unfamiliar with "the stock market" and may not understand the risks, as well as the benefits, of EIAs.

More recently, the staff of the SEC has indicated that the SEC's Division of Investment Management ("IM") is developing a concept release on equity indexed products. IM expects that it will present the concept release "fairly shortly" to the full Commission for review and issuance. Indications are that IM's presentation could occur as early as the end of June.

While the IM staff is understandably reluctant to discuss the specific content of the concept release at this time, staff has indicated that the concept release definitely would not contain any interpretations or policy positions regarding the products.

This outline will briefly discuss the NAIC's model regulation governing the sale of life insurance, in general. It will then review the proposals regarding "balancing language" set forth in the June 5, 1997 Interim Report of the Equity Indexed Products Task Force of American Academy of Actuaries. Finally, it will examine the marketing concerns that are raised by the federal securities laws for those EIAs that are not registered as securities. In that context, it analyzes a fictional piece of non-complying sales literature and provides a framework for examining its content.

II.NAIC Model Rules Governing the Advertising of Life Insurance

The purpose of the NAIC Model Rules Governing the Advertising of Life Insurance (1995) is to "set forth minimum standards and guidelines to assure the full and truthful disclosure to the public of all material and relevant information in the advertising of life insurance policies and annuity contracts."

A.Definitions.

1. "Advertisement" includes any material designed to create public interest in life insurance or annuities or in an insurer, or in an insurance producer; or to induce the public to purchase, increase, modify, reinstate, borrow on, surrender, replace or retain a policy.

2. Advertisements include:

a. Printed and published materials, radio and television scripts;

b. Descriptive literature and sales aids of all kinds, authored by the insurer, its insurance producers, or third parties, issued, distributed or used by the insurer or insurance producer;

c. Materials used to recruit, train and educate an insurer's insurance producers that are designed to be used to induce the public to purchase, increase, modify, reinstate, borrow on, surrender, replace or retain a policy; and

d. Prepared sales talks, presentations and materials used by the insurance producer.

3. Advertisements do not include:

a. Communications and materials used within an insurer's own organization and not intended for dissemination to the public;

b. Communications to policyholders other than materials urging policyholders to purchase, increase, modify, reinstate or retain a policy.

B.Form and Content of Advertisements

1. Advertisements must :

a. Be truthful and not misleading by fact or by implication;

b. Be sufficiently complete and clear so as to avoid deception;

c. Not have the capacity or tendency to mislead or deceive; and

d. Prominently describe the type of policy advertised.

C.Disclosure Requirements

1. No advertisement shall use the terms "investment," "investment plan," or "profits" or other similar terms in connection with a policy in a context so as to mislead a purchaser to believe he will receive, or it is possible to receive, something other than the product purchased.

2. Nonguaranteed Elements

a. An advertisement shall not use or describe nonguaranteed elements in a manner which is misleading or has the capacity to mislead;

b. An advertisement shall not state or imply that a nonguaranteed element is guaranteed;

c. If an advertisement refers to any nonguaranteed element, it shall indicate that the insurer reserves the right to change such element at any time and for any reason.

III. Proposed Balancing Language of the American Academy of Actuaries

A. The Interim Report of the Equity Indexed Products Task Force of the American Academy of Actuaries dated June 5, 1997 (the "Interim Report") contained:

1. A detailed description of equity indexed products;

2. A specific proposal for guidelines regulators can use in developing new model regulations addressing the marketing and disclosure of equity indexed products; and

3. An extensive analysis of several reserving methodologies for equity indexed products.

B. The Interim Report recommended that any marketing materials that contains language regarding nonguaranteed elements provide consumers with a balanced view of the policy provisions inherent in the equity indexed design.

C. The purpose of the balancing language is to ensure that both the negatives and the positives of product features are described to consumers.

D. The Interim Report contains the following examples of balancing language:

1. To the extent that the index methodology uses averaging and it is advertised that protection is provided against downturns, it must also be disclosed that the method does not give full credit for an upturn.

2. To the extent that the index methodology is based on multiple factors, then it must also be disclosed that comparisons of a single factor can be misleading.

3. To the extent that any year to year index increases or volatility (hypothetical or historical) are disclosed, then it must also be disclosed that that performance is no indication as to future performance.

4. To the extent that the index excludes dividends, such a fact should be disclosed.

5. To the extent that early termination or the exercise of withdrawal rights may result in the loss of some or all the benefits of any increases in the Index, this must be disclosed.

6. To the extent that the marketing materials includes statement like "participate in the upside of the Index" or "participate in the upside without risk" then it must also be disclosed that there is a downside risk which can go to the guaranteed minimum level.

E. The Interim Report made the following recommendations regarding the disclosure of contract benefits and values:

1. It suggested that disclosure regarding equity indexed products comply with the proposed NAIC Annuity Disclosure Model Regulation (as revised at the April 30, 1997 Interim Meeting of the NAIC Life Disclosure Working Group) (Attachment A).

2. It recommended that applicants be given a Disclosure Document which includes a description of:

a. The guaranteed and nonguaranteed elements of the contract, and their limitations, if any, and an explanation of how they operate.

3. It recommended that disclosure of "total amounts" (i.e. illustrations) of nonguaranteed elements be optional. It further recommended that if shown:

a. Illustrations of "total amounts" be narrative or tabular, under single or multiple scenario(s) (e.g., historical, hypothetical, level, fluctuating) and under any index;

b. The disclosure may be shown generically or may be personalized to the applicant so long as it is fully identified as to the method used; and

c. Any projection used must be such that the implications of going beyond the initial term of the product design are clearly disclosed to the consumer.

IV. Federal Securities Law Considerations.

In addition to addressing state disclosure and market conduct concerns, EIAS are not registered under the federal securities laws face additional marketing challenges. For an EIA to continue to be viewed as exempt from registration under the federal securities laws, the courts -- including the United States Supreme Court -- and the SEC unequivocally require that the EIA NOT be marketed "primarily as an investment." This outline discusses this general concept, and the somewhat limited specific guidance that the courts and the SEC have provided on the marketing of insurance products, below. Based on this guidance, the outline suggests certain practical marketing guidelines that should be followed by insurance company (and selling agents) to reduce the possibility that the EIA could be viewed as not qualifying for the exemption from federal securities registration provided by Section 3(a)(8) of the Securities Act of 1933 (the "Act").

A. Judicial Interpretations

In virtually every case decided since VALIC, (1) courts have viewed marketing as a significant -- and in some instances, determinative -- factor in determining whether an insurance product is a security.

In S.E.C. v. United Benefit Life Insurance Co., (2) the Supreme Court determined that the "Flexible Fund Annuity" did not qualify for the Section 3(a)(8) exemption from registration under the federal securities laws. In finding that the accumulation phase of that variable annuity constituted an investment contract, and therefore was a security requiring registration, the Court quoted its decision in S.E.C. v. Joiner Leasing Corp. ("Joiner Leasing"):

`The test . . . is what character the instrument is given in commerce by the terms of the offer, the plan of distribution, and the economic inducements held out to the prospect. In the enforcement of an act such as this it is not inappropriate that promoters' offerings be judged as being what they were represented to be.' (3)

The Court noted that the Flexible Fund Annuity, and contracts like it, are not promoted "on the usual insurance basis of stability and security but on the prospect of 'growth' through sound investment management." (4) Such contracts are marketed to compete with mutual funds (5) and "are pitched to the same consumer interest in growth through professionally managed investment."

In Peoria Union Stock Yards Co. v. Penn Mutual Life Ins. Co., (6) the Seventh Circuit reversed a lower court's dismissal of a complaint that alleged that Penn Mutual was selling a security (in this instance, a group deposit administration annuity contract) in violation of the anti-fraud provisions of the federal securities laws. In particular, the court noted the allegation in the plaintiff's complaint that the marketing materials for Penn Mutual's annuity presented Penn Mutual as having investment skills that it "could put to work for the pension trustees." (7) Plaintiffs also alleged that Penn Mutual had promised to credit the deposit account with all investment income on the employer's contribution, net of modest specified charges. If these allegations were true, the Seventh Circuit stated, then the annuity contract in question was an investment contract (and therefore a security) during its accumulation phase, and was not an insurance contract exempt from registration. (8)

More recently, the district court in Associates in Adolescent Psychiatry v. Home Life Ins. Co.(9) found that Home Life's annuity contract was not marketed primarily as an investment just because isolated statements in the company's sales literature referred to the investment aspects of the annuity contract. The court's opinion states that certain statements in marketing materials mentioned the desirability of excess interest as a way of taking advantage of fluctuating interest rates; and that the "sales pitch" for the contract emphasized the insurer's abilities in the management and investment of money. In its opinion, the court stated:

The Court, however, concludes that [the sales literature] does not, when read as a whole, promote the [annuity] primarily as an investment. The document repeatedly stresses that the [annuity] is a method of saving for retirement, with guaranteed principal, guaranteed interest, and a guaranteed life income (through purchase of an annuity with the accumulated funds). (10)

This finding of the Home Life court was reiterated in the decision of federal district court in Berent v. Kemper Corp. (11) The Kemper court analyzed the insurer's promotional materials and found that the life insurance policies in question were marketed primarily as insurance -- as opposed to just finding that they were not marketed primarily as an investment. The court stated:

Whether the policies were marketed primarily as life insurance or as an investment involves construction of the promotional sales materials . . . As Defendants pointed out in their Briefs and at oral argument, the . . . sales brochures clearly emphasize the insurance protection of the policies -- that they are paid up with a single premium, and provide death benefit protection and estate planning advantages. That the policies were marketed primarily as insurance is further evidenced by the facts that the sales brochures provided that the cost of the policies was less for non-smokers and in some circumstances, a physical examination was required for purchasers at specified ages. These medical requirements are certainly not things associated with a pure investment.

The Court agrees with Defendants -- the facts that the sales brochures also discuss the investment features of the policies . . . as investment vehicles does not change . . . the conclusion that the . . . policies were not marketed primarily as investments. (12)

B. SEC Interpretations

1. Sales literature, oral and written representations. In 1979, seven years prior to the adoption of Rule 151, the SEC first expressed its views on the marketing of annuity contracts under Section 3(a)(8) in Release 6051. (13) The SEC stated that a determination of the status of a contract under the Section 3(a)(8) required scrutiny not only of the terms of the contract, but also of the sales literature, the oral and written representations made by authorized salespersons, and other promotion efforts. (14) With respect to promotion efforts, Release 6051 states that:

Advertisements sponsored by insurance companies or authorized salespersons (such as broker-dealers) which emphasize high current discretionary excess interest and relegate mention of traditional annuity features to fine print must be viewed as intended by the sponsors to encourage investment in guaranteed investment contracts principally by those investors who desire to assume the investment risk . . . because their investment objective is to maximize tax-deferred capital accumulation rather than to acquire conventional annuity plans. (15)

Five years later, in Release 6558, the SEC repeated its view that marketing was an essential element in a Section 3(a)(8) determination, and included the following "marketing test" as the third element of the proposed Rule 151 safe harbor: the contract "is not marketed primarily as an investment." (16) Citing the Supreme Court's decision in United Benefit, the SEC restated its belief that insurers marketing a contract "with primary emphasis on discretionary excess interest and other investment oriented features, while relegating mention of the traditional retirement planning features of an annuity contract to the 'fine print,' must be viewed as offering a security, and not insurance." (17) The SEC also quoted United Benefit language to the effect that exempt insurance and annuity policies appeal "on the usual insurance basis of stability and security," and that offerings should be judged as being what they are represented to be. (18)

In addition, Release 6558 noted that since all annuity contracts contain some investment features, it is difficult to identify when a contract is being marketed primarily as an investment. However, Release 6558 states that among the factors to be considered are whether the contract is promoted:

(1) with substantial emphasis on current discretionary excess interest, ... or other investment-oriented features of the contract, and

(2) as one type of tax-sheltered investment that is interchangeable with other such investments. (19)

2. Role of insurer. Release 6558 states that an insurer relying upon Rule 151 has the responsibility to "take reasonable steps" to insure that the marketing of its products is not inconsistent with the marketing "test" of Rule 151, even if the insurer does not directly control the distribution of its products. (20)

Consistent with earlier interpretations, Rule 151 as adopted in 1986 permits a contract to qualify for the rule's safe harbor only if the contract "is not marketed primarily as an investment." (21) Release 6645 explains this standard as follows:

By adopting this standard ... the SEC is not saying, nor has it ever said, that an insurer in marketing its product cannot describe the investment nature of the contract, including its interest rate sensitivity and tax-favored status. The standard adopted by the rule follows the Court's language in United Benefit and means simply that the thrust of the insurer's total marketing plan for the product must be targeted to appeal to purchasers '...on the usual insurance basis of stability and security . . .' For example, a marketing approach that fairly and accurately describes both the insurance and investment features of a particular contract, and that emphasizes the product's usefulness as a long-term insurance device for retirement or income security purposes, would undoubtedly 'pass' the rule's marketing test. (22)

C. Marketing an EIA

The manner in which an EIA is marketed is a key fact and circumstance to be considered in determining the status of an EIA under the federal securities laws. An insurance product may well be deemed to be a security if marketing emphasis is placed on the product's investment aspects rather than its insurance aspects. Excessive emphasis on an EIA's "participation" in the stock market or the S&P 500 Index would, for instance, expose the company to serious risk that an EIA could be found to be a security. However, a balanced approach to the insurance and investment aspects of an EIA is consistent with reliance on Section 3(a)(8).

At a minimum, advertisements and sales literature for an EIA SHOULD:

  • emphasize that the EIA is designed as an appropriate planning vehicle for retirement security;
  • emphasize the guarantees, including guaranteed interest rates, under the EIA;
  • refer to the S&P 500 Index primarily as a factor that in part determines the "excess" interest to be credited and not as a vehicle for complete participation in stock market gains or returns;
  • emphasize the long-term nature of the EIA;
  • emphasize the insurance benefits of the EIA, including the death benefit and annuitization options;
  • explain the indexing feature, and be clear that the "participation rate" in the index, and any other components of the indexing formula that may change, are set only for an initial term, and may be different for future terms; and
  • be clear about the entity backing the guarantees provided by the EIA; i.e., the insurance company.

Marketing materials for an EIA SHOULD NOT:

  • place undue emphasis on the S&P 500 Index, per se;
  • use investment terms such as "investment performance," "investment returns," "maximizing returns," "Wall Street," or the "stock market," except with extreme care (and appropriate caveats);
  • describe the EIA's indexing feature or formula as a means of "participation" in the "stock markets," the "equity markets," or the S&P 500 Index, although indexing may be appropriately described as providing the potential for higher excess interest rates over the long term;
  • provide a partial or complete list of the stocks or the companies that comprise the S&P 500 Index (such a list might suggest that the EIA owner is indirectly investing in stocks); or
  • emphasize similarities to variable annuities, mutual funds, or other investment vehicles.

In making a determination under Section 3(a)(8), the courts and the SEC can be expected to examine closely the totality of the facts and circumstances associated with the marketing, advertising and sales of the product. Based on the cases and SEC releases, a comprehensive marketing plan for the EIA should be developed that addresses the following:

(1) the nature of the channels of distribution. There may be a somewhat increased risk that the EIA could be viewed as a security if sold through registered representatives of broker-dealers.

(2) compensation and incentives for salespersons. Compensation and incentives for appointed agents of the Company selling the EIA should be structured to conform to industry "norms" for sales of fixed annuity.

(3) all promotional efforts, including recruiting and training materials for salespersons, sales literature, advertisements, and authorized oral representations regarding the EIA. The insurer (and any firms selling the EIA) should prepare and monitor these materials (including form letters and prospect meeting or phone call scripts) to ensure consistency with the EIA's status as insurance.

V. Sales Literature: A Fictitious Example

The following specifications and sales literature are completely fictitious and are included herein solely for purposes of discussing the special issues posed by the marketing of equity indexed products.

A. Hypothetical Product Specifications.

1. Type : Single Premium Fixed Annuity.

2. Indexing Method: Seven Year Point-to-Point Design with an Asian End.

3. Index Interest Formula: Excess interest is calculated at end of each seven year term and is measured by: (a) subtracting the index value at the end of the term from the index value on the first day of the term and then dividing by the index value on the first day of the term; (b) multiplied by the participation rate; and (c) multiplied by Principal less all partial withdrawals since the beginning of the term. The index value at the end of the term is the average of the index value on the last day of each of the three months prior to the end of the term.

4. Principal: 100% of the Contract value on the first day of the term.

5. Guaranteed Minimum Value: the single premium times 90%, plus interest at an annual rate of 3% compounded daily, less partial withdrawals at an annual rate of 3%.

. 6. Withdrawal Charge: 8%, 8%, 7%, 6%, 4%, 2%, 2%.

7. Participation Rate: Guaranteed at 90% for the first term.

8. Death Benefit: The greater of the Guaranteed Minimum Value as of date of death of the Owner or Contract Value with excess interest calculated as if the date of the Owner's death were the last day of the term..

9. Renewal Window: During 30 day period at end of each term, withdrawal value is equal to the greater of Contract value as of end of term or Guaranteed Minimum Value on the day of withdrawal.

Note: Strike-through indicates language to remove and text in blue indicates a more suitable approach.

B. Fictitious Sales Literature -- THIS IS A NON-COMPLYING EXAMPLE

THE MARKET PLUS INDEX 500

Now you can experience the great earning opportunities of the stock market without market risk and still have the security of an annuity. You can follow the stock market when it goes up, and avoid risk to your principal when it goes down.

Let's face it. Succeeding financially in today's world requires a new strategy. Traditional components of a secure retirement -- social security, company pensions, personal savings -- are problem plagued. As a way to avoid threats to your retirement security, the ABC Life Insurance Company has crafted the MARKET PLUS INDEX 500, a powerful new solution that offers the "best of both worlds" -- the inflation-beating potential of the stock market combined with a guarantee that you cannot lose your money.

Now you can stay ahead of low interest rates, high taxes and inflation without risking your investment. This combination of upside potential and downside protection is the solution to your retirement needs.

The MARKET PLUS INDEX 500 is an exciting new product that credits market growth to your cash by tracking the growth of the broad based performance standard of the U.S. stock markets -- the Standard & Poors 500 Index. Recognized as a key benchmark for the U.S. equity markets, the S&P 500 has for decades reflected the excellent results of the stock markets, a record that has consistently bested the performance of traditional annuities.

Purchasing the MARKET PLUS INDEX 500 is easy. You begin with a single premium that can range from $10,000 to a high of $1,000,000. At the end of seven years, your interest will be calculated based on the growth in the S&P 500.

What happens after a term? The ABC Insurance Company will impose no penalty if you withdraw your investment after the seven year term. If you choose not to move your cash, it will renew for an additional seven year period and continue to grow with the market.

What if the stock market declines seven years in a row? You are guaranteed to receive a gain of 110% of your original premium.

The bottom line? You are guaranteed total protection against principal loss. MARKET PLUS INDEX 500 is the perfect answer to your needs. You've worked hard for your money. It's time to make it work hard for you.

THE SMALL PRINT: Withdrawals prior to the end of term will result in reduced value. Withdrawals prior to age 59 ½ may be subject to a 10% penalty tax. MARKET PLUS INDEX 500 is a single premium deferred annuity issued by ABC Life Insurance Company.

C. Fictitious Sales Literature -- EDITED

THE MARKET ABC PLUS INDEX 500ANNUITY

The ABC Life Insurance Company is pleased to offer you the ABC PLUS INDEX ANNUITY -- an insurance product designed to maximize your retirement income and long-term accumulation needs. While not an investment product, this equity indexed annuity provides you withNow you can experience the great earningthe potential opportunityto earn interest linked to a portion of any increase in the S&P 500 Index at the end of the seven year termof the stock market without marketrisk and still have the security of an annuity. You can follow the stock market when it goes up, and avoid risk to your principal it goes down.

Let's face it. Succeeding financially in today's world requires a new strategy. Traditional components of a secure retirement -- social security, company pensions, personal savings -- may not provide enough savings for the retirement you want.are problem plagued. As a way to avoid threats to your retirement security, the ABC Life Insurance Company has craftedThe MARKET PLUS INDEX 500 a powerful new solution that offers the "best of both worlds" -- the inflation-beating potential of the stock market combined with a guarantee that you cannot lose your money. The ABC PLUS INDEX ANNUITY is an excellent retirement planning tool that combines guarantees and interest potential. And the ABC PLUS INDEX ANNUITY offers a wide variety of payout options, including lifetime monthly income with guaranteed periods and joint life income, and a death benefit.

Now you have the potential tocan stay ahead of low interest rates, high taxes and inflation. without risking your investment. On the last day of the seven year term, we will credit interest determined by a formula that relates, in part, to changes in the S&P 500 Index. (Its full name is Standard & Poor's 500 Composite Stock Price Index. The S&P 500 is an indicator widely used to measure the overall performance of the United States stock market. It does not include dividends paid on stocks.) We will compute the average value of the S&P 500 Index over the last three months of the seven year term and compare that number to the value of the S&P 500 Index on the first day of the term. The increase, if any, in the S&P 500 Index from the beginning of the term to the three month average at the end of the term is then multiplied by the participation rate to determine the rate of indexed interest, if any, credited to your contract.

The ABC PLUS INDEX ANNUITY is not an investment in the stock market. It is an insurance product that contains a minimum guarantee. We guarantee that the actual interest credited on your ABC PLUS INDEX ANNUITY at the end of a term will never be less than the minimum 3% annual rate applied to 90% of your initial premium. This combination of upside potential and downside protection is the solution to your retirement needs. makes the ABC PLUS INDEX ANNUITY an attractive product designed for your retirement needs.

The MARKET PLUS INDEX 500 is an exciting new product that credits market growth to your cash by tracking the growth of the broad based performance standard of the U.S. stock markets -- the Standard & Poors 500 Index. Recognized as a key benchmark for the U.S. equity markets, the S&P 500 has for decades reflected the excellent results of the stock markets, a record that has consistently bested the performance of traditional annuities.

Purchasing the ABC PLUS INDEX ANNUITY is easy. You begin with a single premium that can range from $10,000 to a high of $1,000,000. At the end of each seven year term, your interest will be calculated based on the growtha percentage of the increase, if any, in the S&P 500 Index during that term. Even if the S&P 500 Index declines at the end of the term, you will receive a guaranteed minimum interest rate of 3% annually on 90% of your initial premium..

What happens after a term? The ABC Insurance Company will impose no penalty if you withdraw your investmentcontract value during the 30 day window at the end of each after the seven year term. If you choose not to move your cashsurrender your contract at that time, it will renew for an additional seven year period and a new indexed interest term will begin. and continue to grow with the market.

The ABC PLUS INDEX ANNUITY is designed for long-term accumulation. However, if your needs change, you can withdrawal all or part of your contract value prior to the end of a term. Withdrawals are subject to a withdrawal charge and do not participate in any potential index-linked interest. If you withdraw before the end of a seven year term, you will only receive 3% annual interest on 90% of your single premium, less any applicable withdrawal charges. Withdrawals are also subject to income taxes and, if taken before age 59 ½, may be subject to a penalty tax.

What if the stock marketS&P 500 Index declines seven years in a row? You are guaranteed to receive a gain of 110% of your original premium. a contract value that reflects 3% annual interest on 90% of your premium, assuming no withdrawals.

The bottom line? You are guaranteed total protection against principal lossif you hold your contract until the renewal window at the end of each term. ABC PLUS INDEX ANNUITY is the perfect answer to your needs. gives you the safety of an annuity and the upside potential to earn an interest rate linked, in part, to the S&P 500 Index. You've worked hard for your money. It's time to make it work hard for you.

Unlike investment products, the ABC PLUS INDEX ANNUITY will pay a death benefit to your beneficiary. The benefit is based upon the greater of indexed interest or guaranteed interest, and the withdrawal charge is waived.

ABC PLUS INDEX ANNUITY is a single premium deferred annuity issued by ABC Life Insurance Company, which backs the guarantees provided by this contract..

VI. Conclusion

Market conduct has emerged recently as an issue of paramount concern to the insurance industry, regulators, and consumers. The costs involved with insufficient market conduct control include not only tangible costs, but reputations of companies and individual agents as well. Several recent initiatives have been developed to address these market conduct concerns, and it is likely that the insurance industry and various regulatory organizations will continue to develop additional initiatives that will directly affect the marketing of EIAs.

Moreover, an EIA may be deemed to be a security if it is marketed "primarily as an investment." Accordingly, companies must monitor and review all marketing materials and training and sales activities relating to its EIAs as part of insurers' efforts to ensure that EIA marketing is consistent with the product's status as "insurance."

Footnotes

1. SEC v. Variable Annuity Life Ins. Co., 359 U.S. 65 (1959), in which the U.S. Supreme Court held that VALIC's variable annuity was a security.

2. 387 U.S. 202 (1967).

3. United Benefit, 387 U.S. at 211 (quoting Joiner Leasing, 320 U.S. 344, 352-53 (1943)).

4. Id. (emphasis added).

5. Indeed, the Supreme Court itself examined the advertising used to sell the "policies" in United Benefit. Speaking for a unanimous court, Justice Harlan noted that:

United's primary advertisement for the "Flexible Fund" was headed "New Opportunity for Financial Growth." United's sales aid kit included displays emphasizing the possibility of investment return and the experience of United's management in professional investing.

387 U.S. at 211 n. 15.

6. 698 F.2d 320 (7th Cir. 1983).

7. 7/Peoria Union, 698 F.2d at 325.

8. Seeid.

9. 729 F. Supp. 1162 (N.D. Ill. 1989), aff'd, 941 F.2d 561 (7th Cir. 1991), cert.denied, 502 U.S. 1099 (1992).

10. Home Life, 729 F. Supp. at 1174 (emphasis added).

11. 780 F. Supp. 431 (E.D. Mich. 1991).

12. Kemper, 780 F. Supp. at 443.

13. Statement of Policy Regarding the Determination of the Status Under the Federal Securities Laws of Certain Contracts Issued by Insurance Companies, Securities Act Release No. 6051, 1 Fed. Sec. L. Rep. (CCH) 2577 (Apr. 5, 1979) ("Release 6051"). Release 6051 was withdrawn in Release 6645, which adopted Rule 151 (cited at note 21 below).

14. Release 6051 at 2583-11. The Release notes that the "mischievous oral comments of a single unscrupulous sales person would not . . . change the status of a company's contracts." Id. at 2580 n.13. However, an "insurance company must be assumed to have authorized or condoned representations about its product which are used repeatedly and disseminated widely." Id. The insurance company is responsible for supervision of distributors to ensure that contracts are offered and sold in a responsible manner. Id. The SEC reiterated these positions in Release 6645 at 88,137 n.48 (cited at note 21 below).

15. Release 6051 at 2580.

16. Definition of "Annuity Contract or Optional Annuity Contract," Securities Act Release No. 6558, [1984-85 Transfer Binder] Fed. Sec. L. Rep. (CCH) para. 83,710 (Nov. 21, 1984) at 87,159 ("Release 6558").

17. Id. at 87,162.

18. Id.

19. Id. (footnote omitted).

20. Id.

21. Definition of Annuity Contract or Optional Annuity Contract, Securities Act Release No. 6645 [1986-87 Transfer Binder] Fed. Sec. L. Rep. (CCH) para. 84,004 (May 29, 1986) at 88,129 ("Release 6645").

22. Release 6645 at 88,137 (emphasis added and footnotes omitted). The Release stated that it would be "counterproductive" to provide a "mechanical checklist of acceptable and unacceptable marketing techniques," and therefore the SEC decided not to publish specific guidelines. Id.

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