BILL ANALYSIS Ó
SB 599
Page 1
SENATE THIRD READING
SB 599 (Kehoe)
As Amended August 29, 2011
Majority vote
SENATE VOTE : 37-1
INSURANCE 11-0 APPROPRIATIONS 17-0
-----------------------------------------------------------------
|Ayes:|Solorio, Hagman, Carter, |Ayes:|Fuentes, Harkey, |
| |Feuer, Grove, Hayashi, | |Blumenfield, Bradford, |
| |Miller, Olsen, Skinner, | |Charles Calderon, Campos, |
| |Torres, Wieckowski | |Davis, Donnelly, Gatto, |
| | | |Hall, Hill, Lara, |
| | | |Mitchell, Nielsen, Norby, |
| | | |Solorio, Wagner |
|-----+--------------------------+-----+--------------------------|
| | | | |
-----------------------------------------------------------------
SUMMARY : Requires life insurance proceeds to be paid in a
lump-sum payment or by another settlement option, including a
retained-asset account (RAA), that is clearly described.
Specifically, this bill :
1)Requires all life insurance benefits to be paid in the form of
a lump-sum payment to the beneficiary or by another settlement
option that is clearly described in the claim form.
2)Provides that if the beneficiary is provided settlement
options in addition to a lump-sum payment or a settlement
option selected by the policyholder, the beneficiary shall
have the option to choose how benefits are to be paid to the
beneficiary.
3)States that if the beneficiary does not choose one of the
available settlement options, an RAA may be the default option
only if the claim form provides a prominent disclosure in
easy-to-understand language in bold 12-font type that, in the
absence of a choice by the beneficiary, payment of policy
benefits shall be made through the RAA on the beneficiary's
behalf.
4)Defines a "retained-asset account" as any mechanism whereby
SB 599
Page 2
the settlement of proceeds under a life insurance policy is
payable by depositing these proceeds 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.
5)Requires life insurers to provide the beneficiary a series of
written disclosures proposed by SB 713 (Calderon), Chapter
130, Statutes of 2011, regarding RAAs. (See proposed Section
10509.937 of the Insurance Code in SB 713 (Calderon).)
6)Provides that if the life insurer offers an option or
recommends the option that the beneficiary receive life
insurance proceeds in the form of an RAA or any arrangement
other than a lump-sum payment, the insurer shall provide the
policyholder written information describing each of the
settlement options available and specific details relevant to
those options.
7)Requires that if the life insurer offers or recommends to a
beneficiary that the beneficiary receive life insurance
proceeds in the form of an RAA at the time the claim is being
made, the insurer shall comply with the procedures proposed in
SB 713 (Calderon), which proposes to enact the Life Insurance
Proceeds Disclosure Act of 2011.
8)Provides that an insurer that fails to conform to the
requirements of this bill shall become subject to the state
laws governing unfair insurance practices.
9)Authorizes the Insurance Commissioner to adopt regulations
specifying reasonable requirements for the form of agreements
entered into and written disclosures in connection with this
bill.
10)Specifies that this bill shall only become operative if SB
713 (Calderon) of this Session is enacted and becomes
effective.
EXISTING LAW :
1)Allows life insurance to be payable as follows:
a) On the death of the insured;
SB 599
Page 3
b) On his or her surviving a specified period;
c) Periodically as long as he or she lives;
d) Otherwise contingently on the continuance or
determination of life; or,
e) Upon those terms and conditions and subject to those
restrictions as to revocation by the policyholder and
control by beneficiaries as shall been agreed to in writing
by the insurer and the policyholder.
2)Provides that no agreement for payment of life insurance shall
vest in the insurer discretion as to the conditions, time,
amount, manner, or method of payment.
3)Authorizes the California Life and Health Insurance Guarantee
Association (CLHIGA) to guarantee 80% of the value of a life
insurance policy, annuity, or RAA up to $300,000 in connection
with a claim against an insolvent insurer.
FISCAL EFFECT : According to the Assembly Appropriations
Committee, there are no significant costs associated with this
legislation.
COMMENTS :
1)The purpose of this bill is to assure that life insurers
cannot require beneficiaries to receive death benefits in the
form of a retained asset account, and to provide that the
beneficiary will have the option to choose how the benefits
will be paid.
2)According to the Department of Insurance (DOI), which is the
sponsor of this bill, existing law permits insurers to require
beneficiaries to be paid life insurance proceeds only via an
RAA. DOI also states that existing law enables insurers to
provide information to beneficiaries regarding their life
insurance proceeds in a manner that can result in the insurers
automatically establishing an RAA.
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'
SB 599
Page 4
payouts into an RAA where in recent years interest rates paid
often exceeded the rates available from banking institutions.
The author and the DOI state that while an RAA provides some
favorable options for beneficiaries, there are some causes for
concern as well. One concern is that RAAs allow insurers to
use their proceeds to accrue investment benefits for
themselves in excess of the benefits distributed to the
beneficiaries.
Another point of concern is that RAAs are not traditional bank
accounts and that has created some troubling situations for
beneficiaries. The DOI states that RAAs can seem like
checking accounts, which they are not, because insurers
provide RAA draft books to beneficiaries that appear like
checkbooks. According to the DOI, there have been cases where
retailers have refused to accept these drafts for one reason
or another. Further, RAAs often have minimum amount
requirements for which a draft can be written. In addition,
consumers may be unclear on how funds in these accounts are
protected, since they are not banking institution checking
accounts. RAAs are not guaranteed by the Federal Deposit
Insurance Corporation (FDIC) but are guaranteed by CLHIGA for
80% of the RAA amount up to a limit of $300,000.
According to the DOI, the 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 group life insurance
coverage uses RAAs as its default payout distribution
mechanism for life insurance settlements. A beneficiary will
not receive a lump sum payout without proactively requesting
one.
3)Another bill being considered this session, SB 713 (Calderon),
proposes a set of disclosures that insurers must follow when
they use RAAs to pay death claims to beneficiaries. In 2010,
the National Association of Insurance Commissioners (NAIC)
developed an informational bulletin on RAAs. SB 713 is based
on the NAIC bulletin, and includes some enhanced disclosures
to help life insurance beneficiaries obtain the information
needed to make an informed decision on whether an RAA is the
appropriate option for them.
SB 599 guarantees beneficiaries are afforded the opportunity to
choose how they want to
SB 599
Page 5
receive their benefits. Together, these two bills create a
consumer protection package.
Analysis Prepared by : Manny Hernández / INS. / (916) 319-2086
FN: 0002116