BILL ANALYSIS Ó SENATE INSURANCE COMMITTEE Senator Ronald Calderon, Chair AB 1747 (Feuer) Hearing Date: June 13, 2012 As June 7, 2012 Fiscal: No Urgency: No VOTES: Asm. Floor(05/14/12)51-24/Pass Asm. Ins. (05/02/12)08-03/Pass SUMMARY Would establish a statutory minimum 60 day grace period for nonpayment of premium on life insurance policies. Also would require that life insurers permit policy owners to designate at least one other person to receive notice of a missed payment and prohibits termination until that notice has been mailed 30 days prior to the effective date of termination for nonpayment of premium. DIGEST Existing law 1. Requires that life insurance policies contain certain provisions, including, but not limited to, an individual life insurance policy notice of the right to cancel a policy; 2. Requires life insurers to provide certain notices to individual life insurance policy holders, including, but not limited to, a notice of premium increases. This bill 1. Would require that every life insurance policy issued or delivered in this state contain a provision for a grace period of not less than 60 days from the premium due date AB 1747 (Feuer), Page 2 that provides that where the premium owed is paid fully within the grace period the policy remains in force; 2. Would also require an insurer to give the applicant for an individual life insurance policy the right to designate at least one person, in addition to the applicant, to receive notice of lapse or termination of a policy for nonpayment of premium; 3. Would require an insurer to provide each applicant with a form, as specified, to make the designation and to notify the insured annually of the right to change the designation; 4. Would prohibit a notice of pending lapse and termination from being effective unless mailed by the insurer to the named insured, a named designee, and a known assignee or other person having an interest in the policy at least 30 days prior to the effective date of termination if termination is for nonpayment of premium; 5. Would also make conforming changes. COMMENTS 1. Purpose of the bill To provide consumer safeguards from which people who have purchased life insurance coverage, especially seniors, would benefit. Under existing law, individuals can easily lose the critical protection of life insurance if a single premium is accidentally missed (even if they have been paying premiums on time for many years). The protections provided by AB 1747 are intended to make sure that policy owners have sufficient warning that their premium may lapse due to nonpayment. 2. Background and Discussion An insurer may not terminate a life insurance policy for nonpayment until 31 days from the date the payment is due. This 30 day grace period is set in regulation, but not in statute. (10 CCR § 2534.3.) This bill intends to add additional procedural protections to a AB 1747 (Feuer), Page 3 policy owner in order to avoid lapse. a. Insured vs. Policy Owner. The insured and the policy owner (or policy holder) is frequently, but not always, the same person. If Spouse A purchases a policy measured by the life of Spouse B, than Spouse A is the policy owner and Spouse B is the insured. The author has explained that the intent of the bill is to provide policy owners additional protections. b. Sixty Day Grace Period. This bill provides for a minimum grace period of 60 days after the date the premium was due. c. Option to Provide Additional Notice of Nonpayment to Designated Recipient and Separate 30 Day Grace Period Triggered by Notice. The bill is based on a long-term care insurance statute and requires insurers to provide a notification of a policy owner's right to designate at least one other person to receive a notice of nonpayment. (Ins. Code § 10235.40.) An insurer would not be able to terminate the policy for nonpayment until 30 days after a notice of nonpayment has been mailed to the insured and a designee (if named) and other person having an interest in the policy (such as an assignee). The insurer would have to notify the insured annually of the right to designate or change the designation of the additional recipient. d. Extends Period of Notice Required to Assignees. Existing law provides protections to assignees, such as creditors who are to receive the benefits of life insurance policy to ensure the debt is covered. An insurer must notify the assignee at least 10 days before the final lapse of the policy. This bill requires that the creditor be notified not less than 30 days prior to the final lapse of the policy. 1. Summary of Arguments in Support a. The Author explains that codifying a grace period AB 1747 (Feuer), Page 4 that provides a longer window of time to pay bill will help reduce the likelihood that policy will lapse. In some instances, people who faithfully paid their life insurance policies for years accidentally let their policy lapse (in some cases, because they were being hospitalized when the bill came, in others, as a result of a mail mix-up or forgetfulness, etc.). Once the policy lapses, the individual must be re-underwritten with a new exam, which may cause the quoted premium to skyrocket or the policy owner to abandon the policy. b. Consumer Federation of California states that by providing the option for a policy owner to name at least one designee to receive a copy of a pending lapse notice, the bill ensures that a trusted friend or relative can make sure the bill is paid in the event the policy owner is unable to respond or simply does not realize the bill has gone unpaid. 2. Summary of Arguments in Opposition None received. 3. Suggested Amendments a. The Committee may wish to consider amendments that replace the term insured with policy owner where the bill refers to the person responsible for making payments or selecting a designee. b. Amend page 2, lines 3 to 7, to read: 10113.71. (a) Every life insurance policy issued or delivered in this state shall contain a provision for a grace period of not less than 60 days from the premium due date. The 60 day grace period shall not run concurrently with the period of paid coverage. The provision shall provide that the policy shall remain in force during the grace period.The provision shall provide that if the premium owed is fully paid within the grace period the policy shall remain in force. AB 1747 (Feuer), Page 5The California Department of Insurance suggested these amendments and explained that: i. Without clarification that the grace period may be read to run concurrently with paid coverage. ii. Under existing law, if the insured dies during the grace period, the premiums owed will be deducted from the benefit paid. Without the amendments, AB 1747 could be read as saying that there is no coverage during the grace period unless the premium is paid. c. Amend page 3, lines 25, to page 3, line 6, to read: 10113.72. (a) An individual life insurance policy shall not be issued or delivered in this state until the applicant has been given the right to designate at least one person, in addition to the applicant, to receive notice of lapse or termination of a policy for nonpayment of premium. The insurer shall provide each applicant with a form to make the designation. That form shallincludeprovide the opportunity for the applicant to submit the name, address, and telephone number of at least one person, in addition to the applicant, who is to receive notice of lapse or termination of the policy for nonpayment of premium. POSITIONS Support California Department of Insurance California Alliance of Retired Americans California Advocates for Nursing Home Reform Congress of California Seniors California Retired County Employees Association Consumer Federation of California National Association of Insurance and Financial Advisors of AB 1747 (Feuer), Page 6 California (NAIFA-California) Opposition None received. Consultant: Hugh Slayden, (916) 651-4773