BILL ANALYSIS                                                                                                                                                                                                    



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          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  








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            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.








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          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  








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            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  








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            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  








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            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  








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            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