BILL ANALYSIS                                                                                                                                                                                                    






                             SENATE INSURANCE COMMITTEE
                           Senator Ronald Calderon, Chair


          SB 281 (Calderon)   Hearing Date:  April 24, 2013  

          As Amended:April 1, 2013
          Fiscal:             Yes
          Urgency:       No
          

          SUMMARY:  Would establish a single set of standards and  
          requirements pertaining to life insurance policies or riders  
          that accelerate death benefits in the event of certain  
          qualifying events.
          
           
           DIGEST
           
          Existing law
            
          1.  Governs the business of insurance, and defines various types  
              of insurance for these purposes, including life insurance  
              and disability insurance; 

          2.  Generally makes the requirements imposed on disability  
              insurance contracts inapplicable to life insurance,  
              endowment, and annuity contracts, or supplemental contracts  
              thereto, that provide additional benefits in case of death  
              or dismemberment or loss of sight by accident, that operate  
              to safeguard contracts against lapse, or give a special  
              surrender benefit, or a special benefit, as specified;

          3.  Requires supplemental contracts or, if a supplemental  
              contract is an integral part of a life insurance contract,  
              life insurance contracts to be submitted for approval by the  
              Insurance Commissioner before the contracts are delivered or  
              issued for delivery in this state.

           This bill

            1.  Would specify that the term "special benefit" for purposes  
              of those provisions to mean an accelerated death benefit  
              that is added to a life insurance contract to provide for  
              the advance payment of any part of the death proceeds to the  
              insured upon the occurrence of certain qualifying events,  




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              including if the insured requires continuous confinement in  
              an eligible institution and is expected to remain there for  
              the rest of his or her life;

           2.  Would require a life insurance contract or supplemental  
              contract that includes an accelerated death benefit to be  
              submitted for approval with specified additional  
              information, including a statement of the types of policy  
              forms with which the benefit will be offered.

           

           COMMENTS
           
          1.  Purpose of the bill  . According to the author, this bill is  
              necessary because it establishes a single set of standards  
              and requirements applicable to life insurance policies or  
              riders that accelerate the death benefit in the event of  
              certain conditions, times when the insured or policy holder  
              usually needs substantial financial assistance. 

           2.  Background  . Accelerated death benefits are a life insurance  
              benefit that allows a policy holder to access all or a  
              portion of a death benefit based on the occurrence of a  
              qualifying event. These benefits can be incorporated into  
              the original policy or added as a rider. Currently, at least  
              42 other states, 41 of which are members of the Interstate  
              Insurance Product Regulation Commission (IIPRC) and New  
              York, offer some form of accelerated death benefits.

              A.    Overview of Life Insurance. Life insurance provides a  
                cash benefit to beneficiaries when the insured dies.  
                According to the American Council of Life Insurers (ACLI),  
                in 2011, total life insurance coverage in the United  
                States amounted to over $19.2 trillion dollars. Although,  
                life insurance may be sold as group policies, individual  
                life insurance accounts for over 57% of the life insurance  
                market. Individual life insurance policies are commonly  
                bought as either permanent or term policies. 

              B.    Overview of Accelerated Death Benefits. An accelerated  
                death benefit permits the owner of a life insurance policy  
                to access a portion or all of the death benefit prior to  
                the death of the insured (the measuring life of the  
                policy) on the occurrence of a qualifying event while the  
                insured is still alive.  California law does not currently  




                                              SB 281 (Calderon), Page 3




                recognize most of the common triggers for accelerated  
                death benefits.  The following description is based on the  
                Standards for Accelerated Death Benefits adopted by the  
                Interstate Insurance Product Regulation Commission (IIPRC)  
                in 2007.  

                Under the IIPRC standards, qualifying events or "triggers"  
                must include a terminal illness trigger and may include  
                additional triggers for one or more of the following  
                conditions:


                 i.       A condition that requires extraordinary medical  
                   intervention, such as major organ transplant or  
                   continuous artificial life support, without which the  
                   insured would die;


                 ii.      A condition that usually requires continuous  
                   confinement in an institution, as defined in the form,  
                   and the insured is expected to remain there for the  
                   rest of his or her life;


                 iii.     A specified medical condition that, in the  
                   absence of extensive or extraordinary medical  
                   treatment, would result in a drastically limited life  
                   span (such as end-stage renal failure, invasive cancer,  
                   Acquired Immune Deficiency Syndrome, etc.);


                 iv.      A chronic illness defined as permanent inability  
                   to perform, without substantial assistance from another  
                   individual, a specified number of activities of daily  
                   living (bathing, continence, dressing, eating,  
                   toileting and transferring), and/or permanent severe  
                   cognitive impairment and similar forms of dementia.

                The insurer may provide for a reasonable expense charge  
                for accelerating the benefit on most features.  (The IIPRC  
                requires the terminal illness trigger but does not allow  
                the insurer to charge it.)  Frequently, policy owners are  
                not charged for the benefit until the acceleration.  

                Once written proof of eligibility is submitted, the  
                benefit becomes due immediately.  Although the insurer may  




                                              SB 281 (Calderon), Page 4




                specify a range or particular amount of the death benefit  
                that may be accelerated, the insurer must provide the  
                policy owner the option to receive payment in a lump sum,  
                but may allow the policy owner to accept periodic payments  
                for a time certain (maybe to minimize taxes).  The insurer  
                may also reduce the lump sum payment according to any  
                outstanding policy loans or charges due at the time of  
                acceleration.

                If only a portion of the death benefit is accelerated, the  
                portion payable upon death of the insured is reduced  
                accordingly, and the premium and cash value are  
                proportionally reduced as well.

              A.    Tax Exempt Chronic Illness Riders. The chronic illness  
                trigger currently proposed in this bill is based on the  
                IIPRC standards and not intended for tax exemption,  
                however, federal tax law (26 USC 101(g)) exempts proceeds  
                from a life insurance policy from taxation if it is paid  
                out by reason of terminal illness or chronic illness.   
                Section 101(g) applies the definition chronically ill from  
                26 USC  7702B where an insured is:


                 i.       Unable to perform (without substantial  
                   assistance from another individual) at least 2  
                   activities of daily living for a period of at least 90  
                   days due to a loss of functional capacity; or


                 ii.      Requiring substantial supervision to protect  
                   such individual from threats to health and safety due  
                   to severe cognitive impairment.

                Additional requirements apply to preserve the tax  
                exemption including the need for the insured to be  
                "certified" as chronically ill once a year and must follow  
                a maximum per diem limit.  Moreover, certain consumer  
                protections are required under Section 101(g)(3).

              A.    Relationship to Long-Term Care Regulation. Long-term  
                care insurance policies are distinct from life insurance  
                policies because they are designed to provide assistance  
                in the event that the insured becomes disabled, confined  
                in an institution etc.  These policies are highly  
                regulated due to a history of escalating rates.




                                              SB 281 (Calderon), Page 5





                Because chronic illness triggers of accelerated death  
                benefits share eligibility criteria with long-term care  
                insurance, California has not approved riders with chronic  
                illness triggers unless those riders also comply with most  
                provisions of the long-term care statute (Chapter 2.6 of  
                Part 2 of Division 2 of the Insurance Code).  The author  
                has informed the Committee that he is working with CDI to  
                identify provisions appropriate to these benefits.  

           1.  Support  

              According to the Association of California Life and Health  
              Insurance Companies, they are sponsoring this bill to  
              expedite approval of one particular product option which  
              will provide a very valuable consumer benefit, known as an  
              accelerated benefit, which allows consumers to obtain all or  
              a portion of a life insurance benefit early when there is a  
              significant and pressing need.

           2.  Opposition  

              None received

           3.  Question/Comments  

              A.    The trigger that requires the insured to have a  
                "condition that requires confinement in an eligible  
                institution and the insured is expected to remain there  
                for life" also touches on long-term care.  The NAIC  
                Long-term Care Insurance Model Act specifically exempts  
                this trigger from LTC insurance standards, but California  
                never adopted that provision. Would this trigger also be  
                subject to the long-term care statute? 

              B.    Additionally this trigger appears to be more  
                restrictive than traditional long-term care insurance  
                triggers. It may be helpful to conduct further research  
                related to the consumer experience in other states that  
                authorize this trigger. 


           1.  Suggested Amendments  

              A.    Current language of the bill relative to chronic  
                illness could result in tax consequences for the consumer.  




                                              SB 281 (Calderon), Page 6




                 Committee staff recommends language be added that  
                conforms the chronic illness accelerated death benefit to  
                Title 26, Internal Revenue Code, Section 101(g) which  
                authorizes a special tax-exemption for accelerated death  
                benefits triggered by chronic illness.  (See definitions  
                provided in Insurance Code Section 10232.8.)

              B.    Committee staff recommends amendments that incorporate  
                the governing principles of the accelerated death  
                including provisions that:  


                  i.       Specify that the benefit must be fixed at the  
                   time the insurer approves the request for the  
                   accelerated death benefit.


                 ii.      Specify that the payment of benefits must not be  
                   conditioned on the receipt of long-term care or medical  
                   services.


                 iii.     Require that the policy or rider include the  
                   option to take the benefits in a lump sum on the  
                   occurrence of a single qualifying event and may include  
                   an option to receive the benefit in periodic payments  
                   for a period certain only.


                 iv.      Prohibit the conditioning of periodic payments  
                   on the continued survival or institutional confinement  
                   of the insured.


                 v.       Prohibit any restriction on the use of proceeds.


                 vi.      Specify that payment of the accelerated death  
                   benefit is due immediately upon receipt of the due  
                   written proof of eligibility.


           1.  Prior and Related Legislation  

              SB 1449 (Calderon), Chapter 567, Statutes of 2012, provided  
              a waiver of the life insurance policy premium for  




                                              SB 281 (Calderon), Page 7




              disability, which allows future premiums due to be waived  
              and the continuance of coverage until the end of the  
              disability or the insured reaches an age as specified by the  
              policy. Further, SB 1449 also provided waiver of surrender  
              charges for life insurance policies and annuities for  
              specified health reasons. 


          POSITIONS
           
          Support
           
          Association of California Life and Health Insurance Companies  
              (Sponsor)
          American Council of Life Insurers
          National Association of Insurance and Financial Advisors of  
              California
          State Farm Insurance Company 
           
          Oppose
               
          None received


          Consultant:  Asia Canady (916) 651-4110