BILL ANALYSIS Ó SENATE JUDICIARY COMMITTEE Senator Noreen Evans, Chair 2011-2012 Regular Session SB 599 (Kehoe) As Amended April 25, 2011 Hearing Date: May 3, 2011 Fiscal: Yes Urgency: No TW SUBJECT Life Insurance: Retained Asset-Accounts DESCRIPTION This bill would require life insurers to provide beneficiaries with settlement options on the life insurance benefit claim form. This bill would authorize a retained asset account to be the default method of settlement payment provided that the claim form provides a prominent disclosure, as specified, that the retained-asset account will be the default payment mechanism if no other option is selected by the beneficiary. This bill would require that a life insurer who recommends to a policyholder or 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 provide in writing to the policyholder or beneficiary the terms of each settlement option. This bill would provide definitions for "lump-sum payment" and "retained-asset account," as specified. This bill also would authorize the Insurance Commissioner to adopt regulations specifying reasonable requirements for the form agreements and written disclosures required under this bill. BACKGROUND A retained-asset account (RAA) is an interest-bearing money market checking account that is established by an insurer for the beneficiary of a life insurance policy, and into which the insurer deposits the policy's death benefit. Insurers are increasingly defaulting to depositing beneficiary insurance settlement payments into RAAs, which are not FDIC insured. (more) SB 599 (Kehoe) Page 2 of ? Last year, the life insurance industry came under fire for paying life insurance benefits to families of deceased soldiers into RAAs. These RAAs accrue interest, some of which is distributed to the beneficiary, but much of the interest is distributed to the insurer maintaining the account. (David Evans, Fallen Soldiers' Families Denied Cash as Insurers Profit, Bloomberg (Jul. 28, 2010) http://www.bloomberg.com/news/2010-07-28/fallen-soldiers-families -denied-cash-payout-as-life-insurers-boost-profit.html as of Apr. 23, 2011.) The California Department of Insurance (CDI) participates in an insurance regulator accreditation program developed by the National Association of Insurance Commissioners (NAIC). This accreditation program provides uniformity among the member state insurance departments as well as consumer protections. Periodically, NAIC develops uniform insurance standards which are included in NAIC's model laws. After the media fallout regarding retained asset accounts maintained by insurers, the NAIC began drafting revisions to its retained asset account bulletin in order to provide for better consumer protection. In December 2010, NAIC adopted a sample bulletin which provided minimum disclosures by insurers regarding the use of RAAs. This bulletin contains disclosure language which the NAIC recommends to be adopted by each member state. Another measure, SB 713 (Calderon, 2011), provides most of these recommended disclosures. This bill differs from SB 713 in that, although it provides disclosure language, this bill also provides disclosure procedures for insurers. This bill would establish procedures to be followed by insurers when making settlement claims to beneficiaries. This bill would authorize an RAA to be the default method of settlement payment as long as the settlement claim form provides a prominent disclosure, as specified, that the RAA will be the default if no other option is selected by the beneficiary. This bill also would require that a life insurer who recommends to a policyholder or beneficiary that the beneficiary receive life insurance proceeds in the form of an RAA or any arrangement other than a lump-sum payment provide in writing to the policyholder or beneficiary the terms of each settlement option. CHANGES TO EXISTING LAW SB 599 (Kehoe) Page 3 of ? Existing law prohibits insurers from knowingly misrepresenting to claimants pertinent facts or insurance policy provisions relating to any insurance coverage. (Ins. Code Sec. 790.03(h)(1).) Existing law requires an insurer to disclose to a first party claimant or beneficiary that all benefits, coverage, time limits, or other provisions of any insurance policy issued by that insurer that may apply to the claim presented by the claimant. (Cal. Code Regs., tit. 10, sec. 2695.4, subd. (a).) This bill would provide that all life insurance benefits shall be paid in the form of a lump-sum payment to the beneficiary or by another settlement option that is clearly described on the benefit claim form. This bill would authorize a retained asset account (RAA) to be the default method of settlement payment only if the claim form provides a prominent disclosure, in easy to understand language set in bold and at least 12-point font, to the beneficiary that, in the absence of the beneficiary choosing a settlement option, payment of the policy benefits shall be made into an RAA. This bill would require that a life insurer who recommends to a policyholder or beneficiary that the beneficiary receive life insurance proceeds in the form of an RAA or any arrangement other than a lump-sum payment provide in writing to the policyholder or beneficiary the terms of each settlement option. This bill would define "lump-sum payment" to mean a single payment made directly to the beneficiary that satisfies all of the benefits owed to the beneficiary. This bill would define "retained-asset account" to mean any mechanism whereby the settlement proceeds payable under a life insurance policy are deposited into an account with check or draft writing privileges, and where those proceeds are retained by the insurer pursuant to a supplemental contract not involving annuity benefits. This bill would provide that an insurer that fails to conform to the requirements under this bill would be in violation of existing law prohibiting unfair methods of competition and unfair and deceptive acts or practices. SB 599 (Kehoe) Page 4 of ? This bill would authorize the Insurance Commissioner to adopt regulations specifying reasonable requirements for the form agreements and written disclosures required under this bill. COMMENT 1. Stated need for the bill The author writes: Beneficiaries are not always emotionally prepared to determine a secure place to deposit life insurance payouts following the loss of a loved one. Recognizing that situation, several life insurance companies automatically deposit beneficiaries' payouts into a Retained Asset Account (RAA). While an RAA does provide some favorable options for beneficiaries, there are some concerning aspects of RAAs. . . . ÝA] little known aspect of RAAs allows insurers to use the proceeds to accrue investment benefits to insurers themselves. Those benefits often produce profits for insurers in excess of the investment benefits that insurers distribute to the beneficiaries whose funds are deposited in RAAs. Beneficiaries of veterans and active duty service members have been disproportionately exposed to the good and bad sides of RAAs. The insurer providing the U.S. Department of Veterans Affairs (V.A.) group life insurance coverage uses RAAs as their default payout distribution mechanism for all lump-sum settlements. A beneficiary will not receive a lump sum payout without proactively requesting one. The California Department of Insurance (CDI), the sponsor of this bill, writes: SB 599 requires insurers to obtain a beneficiary's expressed written declaration as to preferred method of benefit payment. If the beneficiary does not make a designation, RAAs may be used as a default form of payment only if the claim form clearly discloses that in the section of the form where payment is selected. The bill also requires insurers to issue the beneficiary with all RAA-related disclosures specified in SB 713 (Calderon), which are similar, if not more heightened, to the RAA-related disclosures endorsed by the National Association of Insurance Commissioners (NAIC), in all cases, whether by beneficiary choice or default, that an RAA is established. SB 599 (Kehoe) Page 5 of ? SB 599 preserves consumer choice and ensures beneficiaries are made aware of how their benefits will be paid if they fail to make a payment designation on their claim form. 2. Providing settlement payment disclosures for consumer protection This bill would require insurers to inform life insurance policyholders and beneficiaries of death benefit settlement options. Existing law does not require insurers to make policyholders and beneficiaries aware of life insurance death settlement payment options. Accordingly, insurers can pay life insurance benefits into an RAA, which can accrue interest for the benefit of the insurers. RAAs are maintained by the insurer and not held at banks or FDIC insurers. A Bloomberg article demonstrates how an RAA may benefit the insurer more than the beneficiary. (David Evans, Fallen Soldiers' Families Denied Cash as Insurers Profit, Bloomberg (Jul. 28, 2010) http://www.bloomberg.com/news/2010-07-28/fallen-soldiers-families -denied-cash-payout-as-life-insurers-boost-profit.html as of Apr. 23, 2011.) The mother of a fallen soldier was paid $400,000 in death benefits, which was placed into an RAA. The insurer, Prudential Financial, Inc., which provides group life insurance for the Department of Veterans Affairs, sent to the mother a package with information on the death benefit settlement. This package contained checks which could be drawn against the "convenient interest bearing account." The mother, believing the checks could be used like normal bank account checks, attempted to write two different checks against the RAA at two different retailers, but these retailers did not accept RAA checks for payment. The article notes that while the mother was paid one percent interest on the RAA, the insurer earned a 4.8 percent return on this account. Prudential uses RAAs as the default settlement payment mechanism. The National Association of Insurance Commissioners (NAIC) recognized the lack of consumer protection regarding RAAs and issued a sample bulletin in December 2010, which recommends RAA disclosures to be used by life insurers. In conjunction with the NAIC recommendations, the author argues that this bill is necessary to provide consumers with information so that they can make the best decision on how they should receive death settlement payments. SB 599 (Kehoe) Page 6 of ? Consumer Attorneys of California, a supporter of this bill, argues that consumers are unaware that RAA checks do not function in the same way as cash, and retailers have refused to accept RAA checks. Consumers are not given adequate information on how settlement payments placed in an RAA can be accessed. Further, "Ýi]ndividuals who purchase insurance policies generally expect that they will be paid in lump sum form. The law governing payouts should more closely resemble this expectation." Association of California Life and Health Insurance Companies expressed concern that the bill, as introduced, prohibited the use of the RAA settlement payment mechanism unless the policyholder or beneficiary requested the RAA in writing. To address this concern, the bill was amended to allow RAAs to be the default payment mechanism as long as the beneficiary or policyholder is provided with a prominent disclosure that, in the absence of a choice of payment made by the beneficiary, the RAA may be the payment mechanism. The amendment removed all opposition from this bill. This bill would allow insurers to maintain the default RAA settlement payment option while making sure consumers have adequate information as to other settlement payment options. Support : Allstate Insurance Company; Association of California Life and Health Insurance Companies; Congress of California Seniors; Consumer Attorneys of California; Consumer Watchdog; United Policyholders Opposition : None Known HISTORY Source : California Department of Insurance Related Pending Legislation : SB 713 (Calderon) would require life insurers to provide beneficiaries with written disclosures regarding retained asset accounts. This bill is in this Committee. Prior Legislation : AB 786 (2010) would have required insurers to provide disclosures to beneficiaries regarding retained asset accounts. This bill was gutted and amended with these provisions on the Senate Floor and referred to the Senate Rules SB 599 (Kehoe) Page 7 of ? Committee where it was held. Prior Vote : Senate Committee on Insurance (Ayes 5, Noes 3) **************