BILL ANALYSIS Ó
SENATE INSURANCE COMMITTEE
Senator Ronald Calderon, Chair
SB 599 (Kehoe) Hearing Date: April 13, 2011
As Amended: April 4, 2011
Fiscal: Yes
Urgency: No
SUMMARY Would mandate that life insurance proceeds be paid
solely by issuance to a beneficiary of a lump sum check unless
the beneficiary elects in writing to receive payment by another
method; insurer recommendations to a policyholder or beneficiary
to accept an alternative payment to a lump sum check would be
subject to mandatory disclosures.
DIGEST
Existing law
1.Specifies insurance upon life may be made payable various ways
including on the death of the insured. (CIC Section 10170)
2.Requires insurance companies not to knowingly misrepresent to
claimants pertinent facts or policy provisions relating to any
issues of coverage and under related regulations of the
Department of Insurance, insurers are required to disclose to
a beneficiary all benefits, coverage, time limits or other
provisions of the insurance policy. (CIC Sec. 790.03(h)(1)
and CCR Sec. 2695.4(a) of Title 10)
3.Provides that the relationship between the insurer and the
policyholder or beneficiaries under any agreement concerning
the terms and conditions for payment shall be that of debtor
and creditor and the insurer shall not be required to
segregate funds so held but shall hold them as a part of its
general corporate assets. (CIC Sec. 10170 (e))
4.Establishes the California Life and Health Guaranty
Association which provides a guarantee, in the event an
insurer going into default, of 80 percent of the defaulting
insurer's contractual obligations for each valid claim under a
policy or contract up to a maximum of 300,000 dollars in life
insurance death benefits on any one life. (CIC Secs. 1067 et
SB 599 (Kehoe), Page 2
seq., including 1067.02(c)(1), 1067.02(c)(2) (A)(i))
5.Provides that the CLHIGA coverage guarantee does not extend
to:
a. Any portion of a policy or contract not guaranteed
by the insurer, or under which the risk is borne by the
policy or contract owner. (CIC Sec. 1067.02(b)(2)(A))
b. An obligation that does not arise under the express
written terms of the policy or contract issued by the
insurer to the contract or policy owner, including, inter
alia, "claims based on side letters, riders, or other
documents that were issued by the insurer without meeting
applicable policy form filing or approval requirements".
(CIC Sec. 1067.02(J)(ii))
6.Sets payment-related ground rules applicable to life and
disability policies as follows:
a. An insurer may fully discharge its policy
obligations and avoid all claims under a life insurance
policy by making payment in accordance with the policy
terms and any applicable written agreements unless it
receives in its home office written notice of someone
else's claim on the proceeds. (CIC Sec. 10172)
b. An insurer may not withhold payment of money under a
life insurance policy for a period longer than reasonably
necessary to transmit payment and, whenever possible,
payment is to be made within 30 days of the death of the
insured. (CIC Sec. 10172.5 (b))
c. If payment is not made within 30 days of the death
of the insured, the insurer must pay interest, computed
from the date of death, after expiration of the 30 day
period at a rate not less than the current rate of
interest on death proceeds left with the insurer. (CIC
Sec. 10172.5 (a))
d. If a beneficiary elects in writing to receive the
proceeds by other than a lump sum payment, the insurer
does not have a statutory obligation to pay interest.
(But can, of course, enter into a contractual obligation)
(CIC Sec. 10172.5 (d))
This bill
1.Defines:
SB 599 (Kehoe), Page 3
a. "Lump-sum payment" as a single payment made directly
to the beneficiary that satisfies all of the benefits
owed to the beneficiary under a life insurance policy.
b. "Retained-asset account" to mean any mechanism
whereby the settlement of proceeds owed under a life
insurance policy is accomplished by the insurer, (or an
entity acting on its behalf), depositing those proceeds
in an account where those proceeds are retained by the
insurer under a supplementary contract not involving
annuity benefits.
2.Lump Sum Check as Default: Prohibits individual or group life
insurance policies for use in this state from requiring the
beneficiary to take life insurance proceeds in the form of a
retained-asset account or any arrangement other than a
lump-sum payment.
3.Requirement for Written Election (Opt-In): Provides that
unless a policyholder or beneficiary has elected in writing
that the beneficiary shall be paid life insurance benefits in
another form, all life insurance benefits shall be paid in the
form of a lump-sum payment to the beneficiary.
4.Who holds power to Opt-In?: Requires that if a life insurance
policy provides for settlement options in addition to a
lump-sum payment to the beneficiary then:
a. Then policyholder shall have the option to choose
how benefits are to be paid to the beneficiary and such
choice is to be in writing.
b. If no election is made by the policyholder during
the insured's lifetime, then the beneficiary , at the time
the death claim is made, shall choose how life insurance
proceeds are paid and unless the beneficiary agrees in
writing to receive payment in a form other than a
lump-sum payment, the proceeds shall be paid in the form
of a lump-sum payment.
5.Mandatory Disclosure of Settlement Options to Policyholder if
Payment Method is Recommended: Requires that if an insurer
recommends to a policyholder that the beneficiary receive life
insurance proceeds in the form of a retained-asset account or
any arrangement other than a lump-sum payment, the insurer
shall provide the policyholder , at the time the recommendation
is made, written information describing each of the settlement
options available under the policy and specific details
SB 599 (Kehoe), Page 4
relevant to those options.
6.Mandatory Disclosure of Settlement Options to Beneficiary When
Claim is Made: Requires that if an insurer recommends to a
beneficiary that the beneficiary receive life insurance
proceeds in the form of a retained-asset account or any
arrangement other than a lump-sum payment, the insurer shall
provide the beneficiary , at the time a claim is made, written
information describing each of the settlement options
available under the policy and specific details relevant to
those options.
COMMENTS
Purpose of the bill:
1.Purpose according to the Author:
a. "SB 599 seeks to ensure that policyholders and
beneficiaries of life insurance policies have an
opportunity to decide if they want life insurance
proceeds paid out in the form of a Retained Asset Account
(RAA). By requiring individuals to declare that they
specifically authorize an insurer to deposit their life
insurance proceeds into an RAA, a life insurer is
prevented from automatically disbursing the proceeds
through an RAA. SB 599 also provides that in the event
the policyholder or beneficiary does not choose a mode of
payment, the life insurance proceeds shall be paid to the
beneficiary in the form of a single lump-sum check."
b. "Existing law permits insurers to require
beneficiaries to be paid life insurance proceeds only via
an RAA. Additionally, existing law enables insurers to
provide information to beneficiaries regarding their life
insurance proceeds in a manner that essentially results
in the insurers automatically establishing an RAA. RAAs
have certain features that can compromise consumer
protection, profitability, and accessibility."
1. "RAAs are not traditional bank accounts and,
therefore, not protected by the FDIC (a government
entity), and instead Ưare] protected by State
Guarantee Associations (non-governmental entities).
Because beneficiaries cannot split the proceeds among
SB 599 (Kehoe), Page 5
several "insurers" as can be done with insured banking
institutions, the full amount of their proceeds may
not be protected."
2. "Insurers pay interest to beneficiaries on
their RAAs. However, because insurers use the RAA
monies to accrue investment benefits for themselves,
they generally produce profits for insurers far in
excess of the interest income distributed to the
beneficiaries holding the RAAs. The interest rate
paid to beneficiaries is often less profitable than
other potential investment options."
3. "RAAs appear to be similar to checking
accounts because insurers provide beneficiaries with a
draft book. However, because not all retailers
readily accept the RAA drafts and some RAAs have
minimum draft amount requirements, the ability for
consumers' to access their funds is limited."
a. "SB 599 requires insurers to obtain the expressed
permission from either the policyholder or beneficiary in
order for the insurer to deposit the life insurance
proceeds into an RAA. If neither the policyholder nor
the beneficiary makes any determination of how he/she
wants the life insurance proceeds to be paid out, then SB
599 requires the insurer to pay the beneficiary the
proceeds in the form of a single lump-sum check. Given
that the vast majority of consumers' expectations are to
receive a lump-sum check if they complete a claim form
for life insurance benefits, it is the most appropriate
and practical default mode of payment."
1.Purpose according to the Department of Insurance (Sponsor)
a. "This bill ensures that policyholders and
beneficiaries of life insurance policies have an
opportunity to decide if they want their life insurance
proceeds paid out in the form of a Retained Asset Account
(RAA), and provides for the default method of settlement
on life insurance claims to be a single lump-sum check."
b. "Many life insurance beneficiaries are unknowingly
having their insurance proceeds placed into RAAs. This
is because existing law permits insurers to require
beneficiaries to receive their life insurance proceeds
SB 599 (Kehoe), Page 6
only through an RAA. Additionally, existing law enables
insurers to provide information to beneficiaries
regarding their proceeds in a manner that essentially
results in the insurers automatically establishing an
RAA. RAAs have certain features that can compromise
consumer protection, profitability, and accessibility,
namely:
i. RAAs are not traditional bank accounts
and, therefore, not protected by the FDIC. Instead,
they are protected by State Guarantee Associations
(SGA). Under an SGA, a beneficiary's RAA account is
only guaranteed for 80 percent of the amount up to a
limit of $300,000. The FDIC protects bank accounts
for 100 percent of the amount up to a limit of
$250,000.
ii. Insurers pay interest to beneficiaries on
their RAAs. However, because insurers use the RAA
monies to accrue investment benefits for themselves,
they generally produce income for insurers far in
excess of the interest income distributed to the
beneficiaries holding the RAA. The interest rate
paid to beneficiaries is often less than other
potential investment options.
iii. RAAs appear to be similar to checking
accounts because insurers provide beneficiaries with
a draft book. However, because not all retailers
readily accept the RAA drafts and some RAAs have
minimum draft amount requirements, the ability for
consumers to adequately access their funds is
limited.
c. SB 599 ensures that consumers have a choice
regarding how they receive their life insurance proceeds
by requiring that insurers obtain expressed written
declaration from the policyholder or beneficiary as to
method of payment. If neither the policyholder nor the
beneficiary makes a determination on how the proceeds
should be paid, then
SB 599 requires the insurer to issue the beneficiary a
single lump-sum check. A single lump-sum check is the
most appropriate and practical default mode of payment
for two key reasons:
SB 599 (Kehoe), Page 7
i. The vast majority of consumers expect to
receive a lump-sum check if they complete a claim
for life insurance benefits.
ii. The establishment of an RAA alters the
relationship that the beneficiary has with the
insurer from a claimant to an investment customer.
Given that this involves a separate and different
contractual arrangement, it should require the
beneficiary's explicit consent before an RAA is
established.
1. Background and Discussion:
a. Retained Asset Accounts are devices used by
some insurers as a means to provide life insurance
beneficiaries with full access to their funds through
a checking or draft account that permits them to both
earn some interest (it varies among insurers) and
maintain maximum liquidity; i.e. they can write a
check for the full amount of the funds at any time.
b. Concern for the extent of the consumer's
knowledge and awareness about RAA's arose last summer
when instances of difficulty cashing RAA payment
instruments arose. In response to this heightened
visibility and concern, the National Association of
Insurance Commissioners promulgated a recommended
template for disclosure which included the requirement
that any RAA agreement be memorialized in a
supplementary contract as specified in subparagraph
(B) of paragraph (2) of Subdivision (f) of Section
10170.
c. SB 599, at page 3 lines 7 through 19
contemplates that an insurer, either at the time it
recommends use of an RAA to a policyholder (Page 3,
lines 7 to 13), or when at claim time it recommends
the use of an RAA to a beneficiary (Page 3, lines 13
to 19) "shall provide ? written information describing
each of the settlement options available under the
policy and specific details relevant to those
options". While the definition of Retained Asset
Account used in SB 715 does require the use of a
supplementary contract as contemplated in the NAIC
SB 599 (Kehoe), Page 8
disclosure template, the scope of the disclosures
required by SB 599 fall far short of the recommended
scope of the NAIC recommended disclosures pertaining
to the use of RAA's.
d. What is distinctive in SB 599, and differs
from the NAIC approach is the approach, are its new
rules which:
i. Makes payment of life policy
proceeds by a lump sum check to the beneficiary
the default life insurance settlement option by
prohibiting life insurance policies for use in
this state from requiring beneficiaries to take
life insurance proceeds in any form other than a
lump-sum payment. (Page 2, line 26 to 34.)
ii. Mandates an election in writing by
the beneficiary in order to receive a payment in
a different form than a lump sum check. (page 2 ,
line 30 to page 3, line 6)
2. Viewed strictly as a legal matter, recasting existing life
insurer RAA practice within an express written opt-in
framework raises a variety of important issues:
a. At the level of the primary Life
Insurer/Beneficiary relationship, (and the
beneficiary's legal rights with respect to interest
under existing law), a written election by a
beneficiary to receive insurance proceeds by other
than a lump sum payment would appear to jeopardize the
beneficiary's "right" to receive interest on the
insurance proceeds. (CIC 10172.5(d))
If an election in writing by a beneficiary can
jeopardize the right to receive interest, it would
seem to point up the desirability of memorializing any
interest guarantee understanding or "expectancy" in an
express supplemental contract, however improbable the
need for such documentation would seem vis-à-vis an
insurer who is recommending the use of an RAA.
b. However, when this primary Life
Insurer/Beneficiary transaction is seen from the
perspective of a possible future secondary
SB 599 (Kehoe), Page 9
relationship between the Beneficiary and California's
Life and Health Insurance Guaranty Fund the possible
advantage of memorializing an interest rate guarantee
comes into clearer focus. Under CLHIGA, unless the
election is memorialized by a supplemental contract
with a specific interest guarantee (See CIC 1067.02(b)
(2) (J)), the mere possibility that interest could
accrue under the election might be challenged as being
a situation where the risk (of interest earnings above
any guaranteed amount) is borne by the contract owner
and thus excluded from CHLIGA coverage under CIC
Section 1067.02(b) (2) (A). In addition, uncertainty
arises as to whether such supplemental contracts, to
be enforceable under CLHIGA rules, should be subject
to any form filing or approval requirements.
c. To summarize, the legal issues identified, as
currently drafted, SB 599's requirement for a "written
election" may impact the rights of the Beneficiary
under both the underlying insurance policy and under
California Guaranty Fund rules. Additionally, as
noted, SB 599 does not provide the breadth of
disclosures advised by the NAIC; those however are to
be found in SB 713.
d. As a technical matter, the term
"supplementary" contract as used in SB 799 at page 3,
line 30, should be "supplemental". "Supplemental
contract" is the defined term used under California's
Life and Health Insurance Guaranty Fund for purposes
of analyzing whether coverage will be available. (See
CIC Sec. 1067.02(b)(1) and Sec. 1067.04(w))
3. When the policy of SB 599 is viewed from the perspective of
RAA's as potential investment vehicles, the following
observations can be made:
a. RAA's represent a type of holding pen for life
insurance proceeds is both highly liquid (they can be
zeroed out at any time) and which pays interest - to
some degree - from the date of their establishment
until the last dollar is removed. To these financial
attributes, RAA couple the practical fact that the
vehicle itself offers these two advantages in a way
that imposes minimal demands on the bereaved until
they are past their grief.
SB 599 (Kehoe), Page 10
b. Financial Columnist Jane Bryant Quinn
expresses a qualified "approval" for the benefit RAA's
can provide "Retained-asset accounts are a reasonable
and convenient choice, and will be better if better
disclosed. But don't leave the money there long. For
long-term support, you want the payout invested for
higher income and growth." See Online Column, Jane
Bryant Quinn, August 31, 2010, "Life insurance
payouts: Are you earning enough on the money?
c. Once one recognizes that RAA's are both high
liquidity and interest-bearing demand accounts, it is
clear the pool of alternative investment vehicles is
small. Among highly liquid spots to place funds, each
has characteristics that may be important to the
depositor.
i. Retained Asset Accounts are by
definition highly liquid and can be closed at any
time without penalty. While they offer ease of
use plus interest, formalities of their
establishment may be important to guaranty fund
recognition in the event of insurer insolvency.
ii. Certificates of Deposit can offer
higher yields but if the money is withdrawn
before maturity, a penalty results.
iii. Money Market Accounts , while more
flexible than CD's, may have rules that affect
their fitness for a given beneficiary. These can
include requirements for minimum balances, or
limits on the frequency or dollar amount of
checks.
iv. Checking and Savings accounts may
pay interest, but again program rules will
matter.
d. Regarding the risk of loss to the investor of
both principal and interest, while various banks and
credit unions will offer interest bearing checking
accounts that are FDIC or NCUA insured, a brief survey
of "investing" at well-known banks and credit unions
indicates they pass that money off to investment
SB 599 (Kehoe), Page 11
partners which are neither insured or guaranteed.
Principal can be lost. This is true of Bank of
America, Wells Fargo, Chase Bank, and the Golden 1
Credit Union.
4. Summary of Arguments in Support: Supporters, including
United Policyholders, Consumer Watchdog, Congress of
California Seniors, and Consumer Attorneys of California,
(CAOC) state:
a. Most consumers expect that if a claim is made
on a life insurance policy, the result should be a
check rather than a checkbook.
b. SB 599 offers insurance beneficiaries enhanced
protections in relation to current payout practices,
including preventing insurance companies from unfairly
using retained policy proceeds to accrue investment
benefits.
c. RAA monies are not insured by the Federal
Deposit Insurance Corporation (FDIC) and may not be
protected by state guaranty funds.
d. A checkbook, which is not the same as full
benefit payment, is a default feature of an RAA.
e. Some insurers have made it confusing or hard
for beneficiaries to access their RAA funds.
f. A substantial amount of RAA funds go unclaimed
g. SB 599 will make it so consumers must
affirmatively choose to have life insurance benefits
placed in a retained asset account because absent that
affirmative choice, benefits will be paid in the
traditional lump sum manner to the beneficiary.
5. Summary of Arguments in Opposition: Opponents, including
Variable Annuity Life Insurance Company, (VALIC), Allstate
Insurance Company, the Liberty Mutual Group, the Association
of California Life and Health Insurance Companies, (ACLHIC)
the American Council of Life Insurers, (ACLI), MetLife, the
National Association of Insurance and Financial Advisors,
(NAIFA) and the Standard Insurance Company express similar
opposition to the formal written "opt-in" requirement and
the Lump-Sum default feature, stating:
a. When an insured individual dies, a life
insurance company may place the death benefits into a
retained asset account, which immediately begins
SB 599 (Kehoe), Page 12
earning interest for the beneficiary (as opposed to a
lump sum check which does not earn interest until it
is deposited).
b. The beneficiary is able to access those funds
at any time through a check-writing process.
c. At any point, a beneficiary may convert the
funds in a retained asset account to cash or transfer
them to a bank or other financial institution thereby
providing financial flexibility at a time of personal
loss and enabling things to "settle down" so the
beneficiary can weigh important financial decisions
for use of the funds.
d. Finally, opponents generally state that while
consumers have the option to choose a lump sum payment
if desired, retained asset accounts represent a
valuable option for a consumer who does not make an
election. SB 599 would effectively eliminate this
option by requiring payment in lump sum as the default
in all instances and allowing retained asset accounts
only with specific written approval.
6. Amendments:
a. On page 3, line 30, the term "supplementary"
should be changed to "supplemental" to conform the
statute to the terminology of the California Life and
Health Guaranty Association Act.
b. Optionally, the author may wish to include an
amendment to require that the supplemental contract
include an express statement of the guaranteed minimum
interest rate for purposes of CLHIGA coverage under
CIC 1067.02(b)(2)(A).
7. Prior and Related Legislation:
a. SB 713 (Calderon) of the 2011 Session proposes
adoption in California of the NAIC's model for RAA
Consumer disclosures which it adopted in 2010. If
RAA's remain in use in California whether in
accordance with the status quo or under rules such as
SB 599 proposes, a disclosure statute substantially
like SB 713 will be desirable.
SB 599 (Kehoe), Page 13
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
California Department of Insurance (Sponsor)
Congress of California Seniors
Consumer Attorneys of California, (CAOC)
Consumer Watchdog
United Policyholders
Opposition
Allstate Insurance Company
American Council of Life Insurers, (ACLI)
Association of California Life and Health Insurance Companies,
(ACLHIC)
Liberty Mutual Group
Met Life
National Association of Insurance and Financial Advisors,
(NAIFA)
Standard Insurance Company
Variable Annuity Life Insurance Company, (VALIC)
Consultant: Ken Cooley (916) 651-4110