BILL ANALYSIS Ó
SENATE INSURANCE COMMITTEE
Senator Ronald Calderon, Chair
SB 1449 (Calderon) Hearing Date: April 25, 2012
As Amended:April 17, 2012
Fiscal: No
Urgency: No
SUMMARY: Would broaden the definition of life insurance to
include accelerated death benefits and waivers of surrender
charges triggered by specified medical conditions and waivers of
premium triggered by disability. This bill would also add
waivers of surrender charges triggered by specified medical
conditions to the definition of annuity. The bill would
distinguish these insurance and annuity products from
disability, health, and long-term care products that share
similar triggering mechanisms.
DIGEST
Existing law
1. Governs the business of insurance and defines various types
of insurance for these purposes, including life insurance,
and disability insurance.
This bill
1. Would provide that a life insurance policy that includes
accelerated payment of part or all the death benefits, a
waiver of a premium benefit, or a waiver of surrender
charges, as specified shall be deemed to be life insurance or
annuity coverage; and
2. Would provide that an annuity that includes a waiver of
surrender charges, shall be deemed to be annuity coverage, as
applicable and shall not be subject to provisions governing
disability, health, or long-term care insurance, unless those
provisions also apply to life insurance or annuities, as
applicable.
SB 1449 (Calderon), Page 2
COMMENTS
1. Purpose of the bill. According to the author, SB 1449 would
streamline the approval of life insurance and annuity
products triggered by serious medical circumstances,
disability, and cognitive impairment.
2. Background and Discussion
a. Traditional and "Living" Benefits. Life insurance
includes insurance upon the lives of persons or
appertaining thereto, and the granting, purchasing, or
disposing of annuities. (Ins. Code § 101.)
Traditionally, a life insurance policy paid a cash benefit
to a third party designated to receive the benefit
triggered by insured person's death (the "beneficiary").
But developments and innovations have changed the
conditions for payment to allow a life insured to receive
living benefits under circumstances when the insured may
need greater resources or might not be able to afford
policy premiums. These benefits are frequently included
in the form of riders, optional provisions added on to the
policy. Some of these benefits are based on triggers
shared by other types of insurance.
b. Permanent Life Insurance. Life insurance falls into
two categories, term and permanent. Term life insurance,
like many other types of insurance policies, covers the
insured for a specific period (like an annual car
insurance policy). Permanent life insurance, such as a
whole life policy, accrues a cash value over time and
provides lifelong protection as long as the premiums are
paid. The cash value plays an integral role in the
features discussed below.
c. Insurance Regulation. The Insurance Commissioner
("Commissioner") reviews various types of policies (life,
disability, long-term care, etc.) for approval based on
standards developed for those policies. The filing
processes for approval are in part based on the trigger of
benefits, not just the benefits themselves. So life
insurance features triggered by conditions related to
SB 1449 (Calderon), Page 3
medical conditions, disability, or the need for long-term
care will be reviewed based on standards designed for life
insurance, as well as any other classes of insurance that
share those triggers.
d. Living Benefits and the Insurance Product Regulation
Commission (IIPRC). As introduced, SB 1449 would have
permitted California to join the Interstate Insurance
Product Regulation Commission (IIPRC) by adopting the
Interstate Insurance Compact developed by the National
Association of Insurance Commissioners (NAIC) and the
National Conference of State Legislatures (NCSL).
According to the IIPRC website, 41 states have joined the
IIPRC.
Subsequent amendments have narrowed the bill so that it no
long involves the compact and now only applies to certain
benefit features discussed below. These features have
been approved by the IIPRC, along with applicable
standards, and are available in nearly every other state
in the U.S. (Although New York has not joined the IIPRC,
it has approved in statute most of features the addressed
in SB 1449.)
e. Description of Features. In particular, SB 1449
addresses three types of features or benefits for an
annuity or permanent life policy designed to assist a life
insured when he or she may need additional resources or
may not be able to continue to pay for the policy or
annuity:
SB 1449 (Calderon), Page 4
i. Accelerated payment of part or all of the life
insurance death benefit . Under SB 1449, accelerated
death benefits or living benefits could be triggered
by:
Confinement in an eligible institution;
Necessity for extraordinary medical
intervention;
Development of a medical condition that,
without extensive or extraordinary medical
treatment, would result in a drastically reduced
life span;
Inability to perform a specified number of
activities of daily living; or
Cognitive impairment.
The policy determines how much is paid out. According
to the American Council of Life Insurers (ACLI),
accelerated payments typically range from 25 to 95% of
the death benefit. Whatever benefit is received by
the insured reduces the amount that is eventually paid
to a beneficiary.
These benefits are paid directly to the insured or
beneficiary and the policies have no conditions on how
the proceeds may be spent. However, living benefits
may have tax consequences and may impact Medicaid
eligibility, so an insured may prefer periodic
payments to a lump sum.
i. Waiver of the life insurance policy premium
for disability . Under features addressed by SB 1449,
if the insured becomes disabled, future premiums
otherwise due would be waived and coverage continues
in force until the end of the disability or the
insured reaches an age as specified by the policy.
Terms vary in other states where available, especially
in the following ways:
Conditions constituting a disability and
how that condition may impact other requirements
(for instance, some companies may waive this
requirement based on a total loss of sight);
Initial periods of disability before
premiums are waived;
Minimum age requirements to obtain
coverage;
Maximum age limits for the waiver to
SB 1449 (Calderon), Page 5
remain in effect; and
Maximum ages of eligibility (some insurers
may not permit this waiver after attainment of a
certain age).
This type of feature does not involve cash proceeds,
but means for an insured to avoid policy lapse and
loss of coverage.
i. Waiver of surrender charges for life insurance
policies and annuities for specified health reasons .
An insured or annuitant may choose to surrender the
policy or annuity for the cash value. For life
insurance, the cash value is different than the face
value, the amount to be paid to a beneficiary). The
cash value increases over time tax-deferred and may be
used for specified purposes or borrowed (but must be
paid back with interest or the death benefit will be
reduced). Annuities also have a cash value upon
surrender.
Surrender or withdrawal fees may apply if an insured
or annuitant surrenders or withdraws funds from the
policy or annuity within a certain period according to
the terms of the policy. Under the feature addressed
by SB 1449, an insurer could waive surrender charges
if the insured develops a:
Condition that results in a diagnosis with
a limited life expectancy;
Condition requiring care from a health
care facility;
Medical condition that may reduce his or
her life expectancy;
Disability and inability to perform tasks
of daily living or be employed; or
Cognitive impairment.
1. Summary of Arguments in Support
Liberty Mutual Group supports SB 1449 because the benefits
allow consumers to continue coverage without premium payment
or receive much needed care. Most, if not all, states have
either amended their law and regulations to accommodate such
benefits for life insurance or annuity products, or have
just allowed companies to sell these products. There has
SB 1449 (Calderon), Page 6
been a national recognition and acceptance of these consumer
benefits.
2. Summary of Arguments in Opposition
None received (as of April 21, 2011)
3. Questions
a. If enacted and insurers began selling these products,
would these features be available to current
policyholders?
b. How might the availability of these features impact
estate planning or long-term care planning?
c. What risks, if any, might these product features pose
to consumers?
1. Suggested Amendments
The Department of Insurance has suggested that incorporating
product features into the definition of "life insurance" and
"annuity," as currently applied in the bill, conflicts with
California's statutory scheme for regulating other types of
insurance, particularly long-term care insurance. Both the
author and the department have agreed to work together to
prepare an alternative approach that would remain consistent
with the purpose and substance of the bill in its current
form, but work within the California's regulatory scheme.
2. Prior and Related Legislation and Regulation
SB 1434 (Correa), 2007-08 Legislative Session, would have
enacted the Interstate Insurance Compact.
POSITIONS
Support
Association of California Life & Health Insurance Co.
SB 1449 (Calderon), Page 7
(ACLHIC)/Sponsor
American Council of Life Insurers (ACLI)
Liberty Mutual Group (LMG)
Opposition
None received (as of April 22, 2011)
Hugh Slayden, (916) 651-4773