BILL ANALYSIS                                                                                                                                                                                                    Ó


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                                    THIRD READING

          Bill No:  SB 281
          Author:   Calderon (D)
          Amended:  5/1/13
          Vote:     21

           SENATE INSURANCE COMMITTEE  :  9-0, 4/24/13
          AYES:  Calderon, Gaines, Corbett, Correa, Knight, Lieu, Nielsen,  
            Price, Roth

           SENATE APPROPRIATIONS COMMITTEE  :  7-0, 5/23/13
          AYES:  De León, Walters, Gaines, Hill, Lara, Padilla, Steinberg

           SUBJECT  :    Life insurance

           SOURCE  :     Association of California Life and Health Insurance  

           DIGEST  :    This bill 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.

           ANALYSIS  :    

          Existing law:

          1. Governs the business of insurance, and defines various types  
             of insurance for these purposes, including life insurance and  
             disability insurance. 



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          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. Specifies 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, including if the  
             insured requires continuous confinement in an eligible  
             institution and is expected to remain there for the rest of  
             his/her life.

          2. Requires 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.

          3.  Requires that any life insurance provision or supplemental  
             contract that provides for a special benefit comply with  
             specified requirements, including, but not limited to, that  
             the provision or supplemental contract specify that the  
             accelerated death benefit is fixed at the time the insurer  
             approves the request for the benefit, and that the provision  
             or supplemental contract is prohibited from restricting the  
             use of the proceeds of the accelerated death benefit.

          Accelerated death benefits are a life insurance benefits that  
          allow a policy holder to access all or a portion of a death  



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          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.

          Life insurance provides a cash benefit to beneficiaries when the  
          insured dies. According to the American Council of Life  
          Insurers, 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 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 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:

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

          2.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/her life;

          3.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, AIDS, etc.); or

          4.A chronic illness defined as permanent inability to perform,  
            without substantial assistance from another individual, a  



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            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 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.

          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 United States Code (USC) Section  
          101(g)) exempts proceeds from a life insurance policy from  
          taxation if it is paid out by reason of terminal illness or  
          chronic illness.  USC Section 101(g) applies the definition  
          chronically ill from 26 USC Section 7702B where an insured is:

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

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

          Additional requirements apply to preserve the tax exemption  



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          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 USC Section 101(g)(3).

          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.

          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).

           Prior legislation  .  SB 1449 (Calderon, Chapter 567, Statutes of  
          2012) provided a waiver of the life insurance policy premium for  
          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,  
          it also provided waiver of surrender charges for life insurance  
          policies and annuities for specified health reasons.

           FISCAL EFFECT  :    Appropriation:  No   Fiscal Com.:  Yes    
          Local:  No

          According to the Senate Appropriations Committee:

             Department of Insurance estimates that the cost to implement  
             in fiscal year (FY) 2013-14 will be $250,000, in FY 2014-15  
             will be $734,000, and in FY 2015-16 and ongoing will be  

             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  



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             new policy or as a rider to an existing policy.

           SUPPORT  :   (Verified  5/23/13)

          Association of California Life and Health Insurance Companies  
          American Council of Life Insurers
          National Association of Insurance and Financial Advisors of  
          State Farm Insurance Company

           ARGUMENTS IN 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.

          AL:k  5/23/13   Senate Floor Analyses 

                           SUPPORT/OPPOSITION:  SEE ABOVE

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