BILL ANALYSIS Ó SB 281 Page 1 SENATE THIRD READING SB 281 (Ron Calderon) As Amended September 3, 2013 Majority vote SENATE VOTE :38-0 INSURANCE 12-0 APPROPRIATIONS 12-0 ----------------------------------------------------------------- |Ayes:|Perea, Hagman, Bradford, |Ayes:|Gatto, Bocanegra, | | |Ian Calderon, Cooley, | |Bradford, | | |Frazier, | |Ian Calderon, Campos, | | |Beth Gaines, Gonzalez, | |Eggman, Gomez, Hall, | | |Mitchell, Nestande, | |Holden, Pan, Quirk, Weber | | |Olsen, Wieckowski | | | | | | | | ----------------------------------------------------------------- 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 SB 281 Page 2 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 last longer than 90 days to be eligible for an accelerated 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. SB 281 Page 3 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)Permits policy holders to claim an accelerated death benefit after a policy has lapsed if the qualifying event occurred before the policy lapsed. 11)Requires insurers offering accelerated death benefits with a term life insurance policy to offer a waiver of premium benefit option as well. 12)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. 13)Applies existing consumer protections related to the replacement of life insurance policies to accelerated death benefit policies. 14)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. 15)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. 16)Prohibits insurers from cancelling or refusing to renew an accelerated death benefit based on the age or mental/physical health of the insured. 17)Prohibits insurers from increasing premiums for accelerated death benefits because of a divorce. 18)Requires insurers to provide the Commissioner with any printed advertising for accelerated death benefits prior to SB 281 Page 4 its use. 19)Permits the Commissioner to disapprove advertising that does not meet the requirements of the Insurance Code. 20)Requires insurers to stop using advertising that has been disapproved by the Commissioner. 21)Requires insurers to train their agents regarding the differences between accelerated death benefits and long-term care insurance. 22)Prohibits the use of coercive or misleading sales tactics. 23)Makes numerous technical and clarifying changes to the laws governing the waiver of premium and waiver of surrender charge benefits for life insurance policies. FISCAL EFFECT : According to the Assembly Appropriations Committee, on-going special fund costs will likely be between $200,000 and $300,000 to the California Department of Insurance's (CDI) for additional attorneys to review insurer filings for accelerated death benefit riders and policies, an actuary to certify that any rider or policy is sound, and additional personnel in their Consumer Services Division to handle questions and complaints, (Insurance Fund). 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 SB 281 Page 5 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 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 SB 281 Page 6 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. 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 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. Analysis Prepared by : Paul Riches / INS. / (916) 319-2086 FN: 0002326