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.  

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          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
           
                                                                      



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           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.

                                                                      



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           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.
                                                                      



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            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.  
                                                                      



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          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 
                                                                      



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          Committee where it was held. 

           Prior Vote  :  Senate Committee on Insurance (Ayes 5, Noes 3)

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