BILL ANALYSIS Ó
SB 281
Page 1
Date of Hearing: August 7, 2013
ASSEMBLY COMMITTEE ON INSURANCE
Henry T. Perea, Chair
SB 281 (Calderon) - As Amended: August 5, 2013
SENATE VOTE : 38-0
SUBJECT : Life Insurance: Accelerated Benefits
SUMMARY : Authorizes the sale of life insurance with
"accelerated death benefits" features that allow policy owners
to access death benefits when they experience a catastrophic or
chronic illness. Specifically, this bill :
1)Defines "accelerated death benefit" as part of a life
insurance policy that permits the advance payment of part of
the death benefit based on a catastrophic or chronic illness
that meets requirements including:
a) The amount of the benefit payment is fixed at the
time of application.
b) The payment of the benefit is not conditioned on
receiving long-term care or medical services.
c) The benefit may be paid either in a lump sum or
periodic payments.
d) There are no restrictions on the use of the benefit
payment.
e) The insurer cannot impose pre-existing condition
limitations.
f) The insurer cannot condition payment of the benefit
on hospitalization or institutionalization of the
insured.
2)Permits insurers to require the opinion of a qualified health
care practitioner that the applicant meets the federal
definition of a chronically ill individual before paying the
accelerated death benefit.
3)Permits the insurer to require that a chronic illness is
expected to be permanent to be eligible for an accelerated
SB 281
Page 2
death benefit.
4)Specifies that an accelerated death benefit based on a chronic
illness is not, and may not be marketed as, long-term care
insurance.
5)Requires accelerated death benefit contracts filed with the
Insurance Commissioner (Commissioner) to include:
a) A written disclosure detailing the requirements for
requesting an accelerated death benefit payout and the
effect of such a payout on the death benefit and
eligibility for public assistance programs and potential
tax liability.
b) A requirement that agents make specified disclosures
with the application.
c) A requirement that agents provide information
regarding the impact of claiming an accelerated death
benefit on the value of the policy.
d) A requirement that the mandated disclosure include a
description of costs related to accelerated death
benefits.
e) An actuarial memorandum detailing the operation of
the accelerated death benefit.
6)Requires the insurer to provide the insured a statement of the
costs for the accelerated death benefit claim.
7)Permits insurers to ask simple yes/no questions regarding the
applicant's medical condition for underwriting purposes.
8)Requires group life insurance policies with accelerated death
benefits to include a right to convert the group policy to an
individual policy with a comparable accelerated death benefit.
9)Establishes maximum interest rates that may be used when
calculating the amount of an accelerated death benefit.
10)Provides for a 30 day "free look" period in which the insured
may return the policy and receive a refund of premium for any
reason.
SB 281
Page 3
11)Applies existing consumer protections related to the
replacement of life insurance policies to accelerated death
benefit policies.
12)Requires insurers and agents to provide specified notices
when a consumer is replacing a long-term care insurance policy
with a life insurance policy that includes accelerated death
benefits.
13)Requires marketing materials and advertisements for
accelerated death benefits to include statements
distinguishing the accelerated death benefit from long-term
care insurance, describing the benefit, and the tax status of
benefit payments.
14)Prohibits insurers from cancelling or refusing to renew an
accelerated death benefit based on the age or mental/physical
health of the insured.
15)Prohibits insurers from increasing premiums for accelerated
death benefits because of a divorce.
16)Requires insurers to provide the Commissioner with any
printed advertising for accelerated death benefits prior to
its use.
17)Permits the Commissioner to disapprove advertising that does
not meet the requirements of the Insurance Code.
18)Requires insurers to stop using advertising that has been
disapproved by the Commissioner.
19)Requires insurers to train their agents regarding the
differences between accelerated death benefits and long-term
care insurance.
20)Prohibits the use of coercive or misleading sales tactics.
21)Makes numerous technical and clarifying changes to the laws
governing the waiver of premium and waiver of surrender charge
SB 281
Page 4
benefits for life insurance policies.
EXISTING LAW :
1)Defines chronic illness as:
a) Either the inability to perform 2 of 6 activities of
daily living (eating, dressing, bathing, continence,
transferring, toileting), or 2 of 7 activities of daily
living (add walking)
b) A cognitive impairment that requires substantial or
continuous supervision
2)Prohibits insurers, agents and brokers from misrepresenting
the terms or benefits of an insurance policy.
3)Provides that the misrepresentation of the terms or benefits
of an insurance policy is a misdemeanor punishable by
restitution, a fine of up to $25,000 or three times the loss
suffered when the loss exceeds $10,000, and up to one-year in
county jail.
4)Permits the Commissioner to suspend the license of any
insurer, agent or broker who misrepresents the terms or
benefits of an insurance policy.
5)Prohibits unfair or deceptive business practices by insurers,
agents and brokers, including:
a) Misrepresenting the terms or benefits of an
insurance policy.
b) False, deceptive, or misleading advertising.
6)Permits the Commissioner to impose a civil penalty of up to
$5,000 per violation for unfair or deceptive business
practices and up to $10,000 per violation for willfully
deceptive or unfair business practices.
7)Permits life insurance policies to contain provisions to waive
premium charges and surrender charges based on the insured's
SB 281
Page 5
medical condition or employment status.
FISCAL EFFECT : Unknown
COMMENTS :
1)Purpose . According to the author, life insurance is a
crucial component of effective estate and tax planning.
Historically, it has provided substantial resources, known as
a "death benefit," to beneficiaries upon the death of the
insured. Consumers, however, have been demanding life
insurance options that provide additional resources while the
insured is still living. SB 281 would establish streamlined
standards for "accelerated death benefits," life insurance
products that offer a "living benefit" paying all or a portion
of the death benefit when the insured develops specified
catastrophic conditions, such as a life-threatening medical
condition or long-term chronic illness. The benefits are not
designed to cover costs for medical or long-term care services
and may be used for any purpose. SB 281 borrows from national
standards set by the National Association of Insurance
Commissioners and the Interstate Insurance Product Regulatory
Commission (IIPRC). The IIPRC has approved these products for
sale in at least 42 states making these benefits readily
available across the nation. Consumers throughout the United
States have had easy access to these financial tools. It is
time that California consumers enjoy the same opportunity.
2)Accelerated Death Benefits . Current law permits life
insurance policies to allow policy holders with a terminal
illness to access their death benefit to pay for current
expenses. This bill would allow insurers to add similar
benefits for catastrophic or chronic illnesses. The amount of
money provided is capped by the dollar value of the policy's
death benefit. When the policy holder chooses to use an
accelerated death benefit feature, the amount of the death
benefit that will be paid is reduced based on the amount of
the death benefit that was accelerated.
3)Life Settlements . Current law allows the owner of a life
insurance policy to enter into a life settlement where the
SB 281
Page 6
policy owner sells the policy to another party who then
continues paying the premium and collects the death benefit
when the original policy owner dies. This is the primary
means available in California for consumers to access the
value in their death benefits when they need it. There is a
regulatory structure for the life settlements market, but the
ability of an individual policy holder to sell a policy at any
given time is dependent on the presence of a willing buyer and
the sales price is uncertain and based on market forces.
Accelerated death benefits have the advantage of allowing any
policy holder experiencing a qualifying event to access their
death benefit at a set cost and without the uncertainties
involved in a life settlement transaction. If a life
insurance policy contains an accelerated death benefit the
policy holder also has greater flexibility in determining how
much of their death benefit to accelerate.
4)Chronic Illness . The bill is designed to allow consumers to
take advantage of federal tax law that permits the income from
life insurance policies paid based on a chronic illness to
receive favorable tax treatment (referred to as "tax
qualified" benefits). Tax qualified benefits must be paid
based on a determination by an appropriately licensed health
care practitioner that the consumer has a chronic illness with
an expected duration of greater than 90 days. Tax qualified
benefits are also subject to limitations on the amount and
timing of benefit payments. The bill requires that a chronic
illness must be expected to be permanent to qualify for an
accelerated death benefit. This language appears to have the
effect of restricting eligibility for accelerated death
benefits to those conditions that result in continuous
disability rather than episodic disability.
5)Life Insurance Agents . Life insurance and annuity products
can only be sold by an agent licensed by the Department of
Insurance (Department). Aspiring life insurance agents are
required to take 20 hours of training on life insurance and 12
hours of training on law and ethics as part of the licensing
process. The curriculum for these courses is set by the
Department. Once licensed, life insurance agents are required
SB 281
Page 7
to complete 24 hours of continuing education prior to license
renewal. The bill requires that life insurers provide their
agents with training about the differences between accelerated
death benefits and long-term care insurance to help prevent
accelerated death benefits being marketed as an alternative to
long-term care insurance.
6)Prior Legislation . SB 1449 (Chapter 567, Statutes of 2012)
streamlined the process for approval of special features for
life insurance and annuity products that may provide consumers
with much-needed resources during difficult and trying time,
including a waiver of premium during periods of disability and
a waiver of the surrender charge if the insured suffers
specified serious medical conditions, disability, or
unemployment.
REGISTERED SUPPORT / OPPOSITION :
Support
Association of California Life and Health Insurance Companies
(ACHLIC)
Opposition
None received
Analysis Prepared by : Paul Riches / INS. / (916) 319-2086