BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | SB 281|
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UNFINISHED BUSINESS
Bill No: SB 281
Author: Calderon (D), et al.
Amended: 9/6/13
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
SENATE FLOOR : 38-0, 5/29/13 (Consent)
AYES: Anderson, Beall, Berryhill, Block, Calderon, Cannella,
Corbett, Correa, De León, DeSaulnier, Emmerson, Evans, Fuller,
Gaines, Galgiani, Hancock, Hernandez, Hill, Hueso, Huff,
Jackson, Knight, Lara, Leno, Lieu, Liu, Monning, Nielsen,
Padilla, Pavley, Price, Roth, Steinberg, Torres, Walters,
Wolk, Wyland, Yee
NO VOTE RECORDED: Wright, Vacancy
ASSEMBLY FLOOR : Not available
SUBJECT : Life insurance: accelerated death benefits
SOURCE : Association of California Life and Health Insurance
Companies
DIGEST : This bill authorizes the sale of life insurance with
"accelerated death benefits." These policies allow policy
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owners to access death benefits when they experience a
catastrophic or chronic illness.
Assembly Amendments (1) delete the term "special benefit" and
replace it with the defined term "accelerated death benefit,"
(2) generally revise the phrase "provision or supplemental
contract" and replace it with the term "supplemental benefit,"
(3) revise and recast the required language of the provision or
supplemental contract, as specified, (4) extend authorization
for the Insurance Commissioner (Commissioner) to adopt
reasonable rules and regulations to provisions relating to
supplemental benefits that operate to safeguard life insurance
contracts against lapse when the insured becomes totally
disabled and those life insurance contracts with an accelerated
death benefit, (5) delete the provision regarding attainment of
age and instead authorize the waiver of premiums to continue for
a period of time specified in the supplemental benefit, (6)
define "accelerated death benefit" as a policy added to a life
insurance policy to provide for the advance payment of any part
of the death proceeds, payable upon the occurrence of a single
qualifying event, as defined, (7) prohibit an insurer, for
purposes of long-term care insurance, from imposing a
certification requirement of more than 90 days, (8) require a
life insurance policy with an accelerated death benefit
provision to comply with specified requirements, (9) place
limits on advertising and marketing, (10) prohibit an insurer,
broker, agent, or other person from causing a policyholder to
unnecessarily replace a long-term care policy with an
accelerated death benefit policy, and provide certain notices
when a life insurance policy or long-term care insurance policy
are replaced, (11) provide that an insurer that fails to conform
to the requirements of the above provisions would be subject to
the provisions of existing law that provide for the imposition
of a civil penalty, (12) authorize the Commissioner to
disapprove any advertising that does not meet the bill's
requirements, as specified, (13) require a policy, certificate,
rider, or endorsement to include a provision giving the
policyholder or certificate holder the right to appeal to the
insurer a decision regarding benefit eligibility, and (14)
delete obsolete provisions and make conforming changes.
ANALYSIS :
Existing law:
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1. Governs the business of insurance, and defines various types
of insurance for these purposes, including life insurance and
disability insurance.
2. Makes the requirements imposed on disability insurance
contracts, except as provided, 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, or
that operate to safeguard contracts against lapse, or give a
special surrender benefit, or a special benefit, as
specified.
3. Provides the language required as part of a provision or
supplemental contract governed by these provisions.
4. Requires a licensed health care practitioner, independent of
the insurer, to certify that an insured meets the definition
of a "chronically ill individual," as specified by federal
law, for purposes of establishing eligibility for benefits
under a long-term care policy or certificate that provides
home care benefits.
5. Requires a licensed health care practitioner, independent of
the insurer, to certify that an insured meets the definition
of a "chronically ill individual," as specified by federal
law, for purposes of establishing eligibility for benefits
under a long-term care policy or certificate that provides
home care benefits.
6. Authorizes the Commissioner to adopt reasonable rules and
regulations necessary to administer and carry out the
purposes of certain provisions relating to the required
language in a provision or supplemental contract.
7. Authorizes provisions or supplemental contracts that operate
to safeguard life insurance contracts against lapse, in which
the insurer waives the premium or monthly deduction for a
life insurance contract when the insured becomes totally
disabled, and where the waiver continues until the end of the
insured's disability, or until the attainment of an age
established by the insurer.
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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 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. Prohibits an insurer, for purposes of long-term care
insurance, from imposing a certification requirement of
longer than 90 days.
6. Requires accelerated death benefit contracts filed with the
Commissioner to include:
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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.
7. Requires the insurer to provide the insured a statement of
the costs for the accelerated death benefit claim.
8. Permits insurers to ask simple "yes"/"no" questions
regarding the applicant's medical condition for underwriting
purposes.
9. 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.
10.Establishes maximum interest rates that may be used when
calculating the amount of an accelerated death benefit.
11.Permits policy holders to claim an accelerated death benefit
after a policy has lapsed if the qualifying event occurred
before the policy lapsed.
12.Requires insurers offering accelerated death benefits with a
term life insurance policy to offer a waiver of premium
benefit option as well.
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13.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.
14.Applies existing consumer protections related to the
replacement of life insurance policies to accelerated death
benefit policies.
15.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.
16.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.
17.Prohibits insurers from cancelling or refusing to renew an
accelerated death benefit based on the age or mental/physical
health of the insured.
18.Prohibits insurers from increasing premiums for accelerated
death benefits because of a divorce.
19.Requires insurers to provide the Commissioner with any
printed advertising for accelerated death benefits prior to
its use.
20.Permits the Commissioner to disapprove advertising that does
not meet the requirements of the Insurance Code.
21.Requires insurers to stop using advertising that has been
disapproved by the Commissioner.
22.Requires insurers to train their agents regarding the
differences between accelerated death benefits and long-term
care insurance.
23.Provides that an insurer that fails to conform to the
requirements of the above provisions is subject to the
provisions of existing law that provide for the imposition of
a penalty against any person who engages in any unfair method
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of competition or any unfair or deceptive act or practice in
the business of insurance, as provided, including civil
penalties as well as a misdemeanor for an insurer
intentionally advertising insurance that it will not sell.
24.Makes numerous technical and clarifying changes to the laws
governing the waiver of premium and waiver of surrender
charge benefits for life insurance policies.
25.Provides that no state reimbursement to local agencies is
necessary under provisions of this bill.
Background
Accelerated death benefits are life insurance benefits that
allow a policy holder to access all or a portion of a death
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:
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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
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,
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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
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: Yes
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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
new policy or as a rider to an existing policy.
SUPPORT : (Verified 9/9/13)
Association of California Life and Health Insurance Companies
(source)
American Council of Life Insurers
Department of Insurance
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 9/11/13 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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