BILL ANALYSIS Ó
SENATE COMMITTEE ON INSURANCE
Senator Richard Roth, Chair
2015 - 2016 Regular
Bill No: AB 565 Hearing Date: June 22,
2016
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|Author: |Cooley |
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|Version: |March 10, 2016 Amended |
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|Urgency: |No |Fiscal: |No |
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|Consultant:|Hugh Slayden |
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Subject: Group life and disability insurance: required
provisions
SUMMARY Revises the standards for group life insurance related to
waiver of premium benefits and dependent coverage.
DIGEST
Existing law
1. Establishes standards for life and disability insurance and
subjects life and disability insurers to regulation by the
California Department of Insurance (CDI).
2. Authorizes life insurers to issue a master group life insurance
policy to employers, unions, credit unions and other qualified
associations, so that individual members of the group may obtain
coverage through that master policy.
3. Requires that every master policy include a provision that the
insurer shall issue to the policyholder an individual
certificate for distribution to the insured employee or group
member that describes the insurance coverage.
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4. Permits an insurer to cover dependents of an insured employee,
under specified conditions, so that the employee receives a
death benefit on death of the dependent.
5. Defines dependents to include the insured's spouse, all
children from birth until 26 years of age, or a child 26 years
of age or older that suffers from a qualifying disability and is
incapable of self-sustaining employment.
6. Authorizes insurers to include a benefit that waives premium
charges on life insurance policies when the insured suffers a
total disability.
7. Defines "total disability" as, during the first 24 months, the
inability to perform the duties of the insured's current job due
to sickness or bodily injury and, after the first 24 months, the
inability to perform the duties of any suitable job due to
sickness or bodily injury.
8. Requires an insurer, under waiver of premium benefit under a
group policy, to waive all premiums due for the entire period of
total disability if the insured develops a total disability
before age 60.
9. Requires an insurer, under waiver of premium benefit under a
group policy, to waive all premiums until the insured reaches
age 65 if the insured develops a totally disability after
attaining age 60.
This bill
1. Permits an insurer to issue an individual certificate directly
to the group member.
2. Revises the definition of "dependent" for the purpose of
issuing dependent coverage, to include children up to the age of
26.
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3. Authorizes the insurer to permit the policyholder to elect
coverage for dependent children based on factors such as marital
status, student status, residency, or support requirements and,
for dependent children over the age of majority, the group
policyholder may elect coverage at age variations up to the
limiting age.
4. Requires an insurer, under waiver of premium benefit under a
group policy, to waive all premiums due for the period of total
disability until the insured attains 65 years of age if the
insured develops a total disability before age 60.
5. Authorizes an insurer, under waiver of premium benefit, to
offer a policy that excludes disabilities developed once the
insured reaches age 60 or older, but if the insurer offers that
policy, it must also offer a policy that waives premiums until
the age of 65.
COMMENTS
1. Purpose of the bill According to the author, AB 565
clarifies that group life insurance policies are allowed,
but not required, to provide coverage for the dependents of
employees up to age 26. It also clarifies that a group life
waiver of premium benefit is not required to be offered
after age 60 and may end at separation from the group or at
age 65 - a change that will align California group life
provisions with national standards.
2. Background Group life insurance policies provide coverage
to group members under a master policy. Each insured
receives a certificate evidencing coverage. Group coverage
is usually purchased through an employer, but may be
purchased through other authorized associations. These
policies are less expensive than individual counterparts and
a medical exam is not usually required.
Group policies provide a standard set of benefits chosen by
the master policyholder. For example, an employer may
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select the benefits and pay some or all of premium.
Premiums for group policies are tied to the claims
experience of the group; claims costs will result in
increases in premium for the entire group. Coverage
typically ends when the member leaves the group, such as
when an employee changes jobs or retires. Employees have
the right to convert the certificate to a permanent,
individual policy when the employment relationship ends.
However, the individual must choose from an individual
policy offered by that insurer and pay the premium.
According to the Association of California Life and Health
Insurance Companies (ACLHIC), most group insurance is
renewed on an annual term basis and offered to active
employees. Individual policies are usually for longer terms
or permanent (do not expire and the contract conditions
remain fixed) and do not depend on employment or
association.
Dependent Coverage. Dependent life insurance covers a
member's spouse or qualified child and pays the benefit to
the member when a covered dependent dies. In 2011, SB 220
(Price), Chapter 126, Statutes of 2011, authorized insurers
to cover children "from birth until 26 years of age."
However, stakeholders disagree as to whether insurer must
cover all children up to age 26, or whether an insurer may
cover children up to a selected maximum age that is no
greater than age 26. This bill would clarify that an
insurer may offer a policyholder the option to choose a
maximum age limit at or between 18 and 26. It also
expressly provides that coverage may be limited based on
factors related to dependency including marital status,
student status, residency, or whether the group member is
supporting the child.
Waiver of Premium. Insurance coverage designed to replace
lost income due to total disability often terminates at age
65. These policies are a form of disability (not life)
insurance and subject to a different set of standards. Life
insurers may waive premium during periods when the insured
can no longer work so that coverage remains in force until
the end of the disability or the insured reaches an age
specified by the policy. This feature does not replace
income or provide a cash benefit.
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Prior to 2013, CDI applied disability insurance standards to
life insurance policies that waive premium for disability.
The application of dual standards presented a significant
obstacle for insurers to introduce premium waivers into the
California market. SB 1449 (Calderon, 2012), Chapter 567,
Statutes of 2012, established specific standards for waivers
of premium including minimum waiver periods based on whether
the insured develops a disability before or after reaching
the age of 60. SB 1449 was based on standards developed by
the Interstate Insurance Product Regulation Commission
(IIPRC) designed for individual life insurance policies that
had no connection to retirement or termination of
employment. (The IIPRC establishes a uniform set of
standards and a single policy approval process for its 44
participating states; the approved product may be sold in
all member states.)
In 2013, after the enactment of SB 1449, the IIPRC adopted
standards specific to group policies that permit the insurer
to require that the disability begin before age 60 and that
permit the insurer to terminate the waiver at set age not
less than age 65. At the same time, industry stakeholders
began raising concerns that standards established by SB 1449
made these policies unaffordable. In response, the
Legislature enacted AB 2578 (Dababneh), Chapter 360,
Statutes of 2014, permitting insurers to limit the waiver to
the period of disability.
AB 565 continues the approach taken by AB 2578 and more
closely aligns California law to the IIPRC standards
applicable to group policies. Similar to disability income
insurance, this bill permits insurers to terminate the
waiver of premium benefit at a proxy retirement age (65
years or older) when the insured develops a disability
before age 60. It also permits the insurer to limit the
waiver of premium benefit to disabilities developed before
the age of 60, even if the insured remains a member of the
group.
3. Support ACLHIC points out that unlike the federal
Affordable Care Act that provides coverage that benefits
dependent children, dependent life insurance coverage pays
the benefit the parent/group member. An interpretation of
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existing law that requires coverage for all children under
age 26 unduly restricts options for employers and affinity
groups.
ACLHIC also argues that group life insurance is usually
provided during an insured's span of employment with the
group policyholder or with a known set of limitations as
part of affinity group coverage. Treating group coverage
like individual coverage could lead employers and groups to
forego the waiver of premium benefit due to the added
expense. As a result, employees would be deprived of the
ability to have their premium paid while disabled, at a time
they most need financial help.
4. Opposition CDI has raised concerns that subclassifications
of dependent coverage might not be actuarially justified.
CDI also questions the assertion that the existing standards
are not cost-effective. Additionally, CDI expresses concerns
that policyholders currently holding the more generous
benefits required under existing law will be forced to take
the less generous benefits authorized by this bill.
5. Suggested Amendments
Amendments to Section 10270.6 that authorize the group
insurer to deliver certificates directly to group members
are the result of a drafting error.
The author has agreed to take amendments that address
concerns raised by CDI in its letter of opposition. The
amendments would do the following:
a. Remove language that explicitly authorizes the group
policyholder to select groups of children based on
specified factors, such as marital status, student status,
residency, or support requirements. Stakeholders agree
that such factors may be relevant to determining in
whether children of the insured are actually dependent on
the insured. However, SB 220 unintentionally required
insurers to cover all children up to age 26 and severely
restricted a master policyholder's ability to limit
coverage to what they view as actual dependents. These
amendments are intended to return the law, in that regard,
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to what it was prior to SB 220, and continue the prior
practice of evaluating the validity of factors on a
case-by-case basis according to their actuarial relevancy
to actual dependency, insurable interest, and impact on
mortality.
b. Require insurers to offer a master policyholder the
option to renew the more generous waiver of premium
period. This bill would allow insurers to offer less
generous periods of waived premium when an insured
develops a qualifying disability. CDI expressed concerns
that existing master policyholders may be forced to give
up these benefits under the new standards. These
amendments are intended to give the master policyholder
the option to continue the more generous benefits on
subsequent renewals. Although, the insurer would not be
required to offer the more generous benefit on renewal in
later years if the policyholder chooses the less generous
option, representatives of the insurance industry explain
that an insurer would likely accommodate a request by the
policyholder to add the more generous benefit (but at a
higher premium).
POSITIONS
Support
Association of California Life and Health Insurance Companies
(sponsor)
American Council of Life Insurers
Oppose
California Department of Insurance
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