BILL ANALYSIS Ó Senate Appropriations Committee Fiscal Summary Senator Kevin de León, Chair SB 281 (Calderon) - Life Insurance Amended: May 1, 2013 Policy Vote: Ins 9-0 Urgency: No Mandate: No Hearing Date: May 20, 2013 Consultant: Maureen Ortiz This bill meets the criteria for referral to the Suspense File. Bill Summary: SB 281 establishes 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. Fiscal Impact: CDI estimates that the cost to implement in FY 2013-14 will be $250,000, in FY 2014-15 will be $734,000, and in FY 2015-16 and ongoing will be $407,000. Application fee revenue is projected to be $119,000 in FY 2013-14, $119,000 in FY 2014-15 and $15,500 in FY 2015-16 and subsequent fiscal years. Additional fee revenue of $50,000 to $90,000 over FY 2013-14 and FY 2014-15 for the $1 special assessment insurers pay for each life insurance policy issued, dependent on whether or not consumers purchase the accelerated death benefit under a new policy or as a rider to an existing policy. The cost estimate provided by CDI is based on the expected need for additional attorneys to review insurer filings for accelerated death benefit riders and policies, and an actuary to certify that any rider or policy is sound. In addition, the department anticipates the need for 3.2 PYs at a cost of $324,000 in the Consumer Services Division to handle questions and complaints. Other costs result from additional investigators, and compliance officers. It is not likely, however, that many complaints will be generated during the first year - but more likely that complaints/questions will flow in over the years and that most consumers will contact the department during the period of time when the benefit will be SB 281 (Calderon) Page 1 accessed. Application fee revenue estimates provided by CDI are based on an expected 100 insurers filing for approval of the accelerated death benefit riders and that only about 60% of those applications will be approved. Insurers only pay the fees upon approval of the filings. 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. Existing law requires life insurance contracts to be submitted to the Insurance Commissioner for approval before the contracts are delivered or issued for delivery in this state. 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. 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 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: SB 281 (Calderon) Page 2 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. Proposed Law: SB 281 defines "special benefit" 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. "Qualifying events" includes specified chronic illnesses or situations where the insured requires continuous confinement in an eligible institution and is expected to remain there for the rest of his or her life. Any insurer that offers an accelerated death benefit must comply with all of the following: a) The contract must specify that the accelerated death benefit is fixed at the time the insurer approves the request for the accelerated death benefit. SB 281 (Calderon) Page 3 b) The contract must specify that the payment of the accelerated death benefit is not conditioned on the receipt of long-term care or medical services. c) The contract must include an option to provide the benefit in a lump sum, and may include an option to receive the benefit in periodic payments. d) The contract must not restrict the use of the proceeds of the accelerated death benefit. e) The contract must specify that payment is due immediately upon receipt of the due written proof of eligibility. Additionally, the policy must include other items such as a sample calculation of the accelerated death benefit, all policy benefits, premium payments, as the cost of insurance charges and values. Staff Comments: SB 281 specifically authorizes the Department of Insurance to adopt reasonable rules and regulations that are necessary to implement the provisions of this bill. SB 476 (Steinberg), currently pending before this committee, requires insurers to pay a special assessment of $1 on each life insurance/annuity policy issued. Of the total amount of revenue collected, 50% is distributed to district attorneys for investigating and prosecuting individual life insurance and annuity product financial abuse cases involving insurance licensees. The remaining 50% is used by the CDI to regulate and oversee life insurance products and to respond to consumer inquiries and complaints related to life insurance or annuity products.