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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