BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | SB 281|
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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
Companies
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.
Background
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
impairment.
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
$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
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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
(source)
American Council of Life Insurers
National Association of Insurance and Financial Advisors of
California
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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