BILL ANALYSIS Ó
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,
SB 281 (Calderon), Page 2
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
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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
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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