BILL ANALYSIS Ó SENATE COMMITTEE ON INSURANCE Senator Richard Roth, Chair 2015 - 2016 Regular Bill No: SB 426 Hearing Date: April 8, 2015 ----------------------------------------------------------------- |Author: |Leyva | |-----------+-----------------------------------------------------| |Version: |February 25, 2015 | ----------------------------------------------------------------- ----------------------------------------------------------------- |Urgency: |No |Fiscal: |No | ----------------------------------------------------------------- ----------------------------------------------------------------- |Consultant:|Erin Ryan | | | | ----------------------------------------------------------------- Subject: Annuities: cash surrender benefits SUMMARY Requires the death benefit payable under annuities contracts issued to persons 65 years of age or older to be at least equal to the annuity value or accumulations value without any surrender charges or penalties upon death. DIGEST Existing law 1. Provides for the regulation of annuities contracts, including minimum nonforfeiture amounts prior to maturity (§10168.2); 2. Requires all disability and life insurance policies or certificates offered for sale to individuals 65 and older to include a 30 day "free look" period starting on receipt of the policy or certificate; 3. Provides that for annuities contracts that provide cash surrender benefits prior to maturity, any death benefit payable shall be at least equal to the cash surrender benefit; (§10168.4) 4. Imposes, generally speaking, a special duty of honesty, good faith, and fair dealing on an insurer, broker, agent, and all others engaged in the transaction of insurance with a prospective insured who is 65 years of age or older; (§785) SB 426 (Leyva) Page 2 of ? 5. Requires individual life insurance policies and annuity contracts issued to senior citizens to disclose information on, or the location within the policy of, any charges for surrender, partial surrender, excess withdrawal or penalties on the front of the policy jacket or on the cover page (§10127.13). This bill 1. Would require the death benefit payable under annuities contracts issued to persons 65 years of age or older to be at least equal to the annuity value or accumulations value without any surrender charges or penalties upon death. COMMENTS 1. Purpose of the bill To provide additional protections to seniors who purchase fixed rate and equity-linked annuities by prohibiting surrender charges or penalties on death. 2. Background An annuity is a contractual financial product that is designed to accept and grow funds from an individual and then, upon annuitization, pay out a stream of payments to the individual at a later point in time. Annuities were designed to be a reliable means of securing a steady cash flow for an individual during their retirement years and to alleviate fears of outliving one's assets. Annuities can be created so that, upon annuitization, payments will continue so long as either the annuitant or their spouse (if survivorship benefit is elected) is alive. Alternatively, annuities can be structured to pay out funds for a fixed amount of time, such as 20 years, regardless of how long the annuitant lives. Furthermore, annuities can begin immediately upon deposit of a lump sum, or they can be structured as deferred benefits One criticism of annuities is that they are illiquid. Deposits into annuity contracts are typically locked up for a period of time, known as the surrender period, where the annuitant would incur a penalty if all or part of that money were touched. These surrender periods can last anywhere from SB 426 (Leyva) Page 3 of ? 2 to more than 10 years, depending on the particular product. Surrender charges can start out at 10% or more and the penalty typically declines annually over the surrender period. This is a particular concern for annuities sold to seniors who may experience unexpected medical or other costs or illness and cannot access their assets when needed. This bill is limited to fixed rate and equity linked deferred annuities that are sold to individuals who are 65 years of age or older. With a deferred annuity, an annuitant pays up-front or over time for an income stream they will receive beginning at a specified date in the future. The annuitant generally does not receive a benefit until the specified date unless he or she passes away before that date and the beneficiary receives a death benefit as provided in the contract. An example of the problem this bill seeks to address: a consumer purchases an 8-year deferred fixed annuity for an upfront premium of $10,000. The contract credits 3% interest per year to the account and has an 8 year surrender period beginning at 8% and declining 1% annually. If the annuitant dies in the first year of the contract, the annuitant's beneficiaries would receive $9,200. If the annuitant dies in the second year of the contract, the death benefit would be $9,579. The contract would not pay the amount of the initial premium for more than two years. If the annuitant had received benefits or payments during the surrender period, any such payments would be deducted from the annuity value for purposes of the death benefit. The Association of California Life and Health Insurance Companies (ACLHIC) and the American Council of Life Insurers (ACLI) say the overwhelming majoriy of contracts do not impose a surrender charge upon the death of the annuitant, although certain contracts might have a charge that is offset by another benefit included in the contract. ACLHIC and ACLI have, however, expressed some concerns with the bill as drafted. First, they ask that the bill be clarified to only apply to annuity contracts issued after the bill's effective date. Secondly, they express concern over the application of the bill to deferred income annuity products-products that frequently are used as a tax-deferral SB 426 (Leyva) Page 4 of ? tool. This product provides guaranteed income at some point in the future (anywhere from 13 month to 30 years after the last premium payment was made). If death occurs prior to the date that income payments begin, the contract allows for return of premium. The bill as proposed would require a death benefit equal to the contract's "annuity amount" or "accumulated value," but does not allow for just the return of premium. ACLHIC doesn't think the bill should apply to deferred income annuity products. 3. Support According to the California Department of Insurance, this bill would would create a best practice for insurers by providing additional protections for seniors who purchase fixed, deferred annuities. It would prohibit companies from charging a surrender penalty on the death benefit and require the benefit payment to be at least equal to the annuity value upon death. California Advocates for Nursing Home Reform supports SB 426 because it offers additional protections to seniors and their families by placing safeguards on an insurance product that is intended to provide them financial security. According to the Elder Financial Protection Network, for seniors who are generally buying annuities to protect themselves from out-living their money, surrender penalties on death can result in very low annualized interest or even a partial loss of premiums. While most companies do not currently pay out a death benefit that is less than the premiums paid, some insurers charge surrender penalties that reduce the death benefit below the amount of paid premiums. 4. Opposition None received. 5. Questions In the case of deferred income annuity products, should seniors be limited to the return of premium upon death if the premium has been in the possession the insurance company for years generating interest income that would have been included in the future payment of benefits? ACLHIC and ACLI have asked for an amendment as follows: "the death benefit payable under contracts issued to persons 65 years of age or older shall be at least equal to the annuity value,oraccumulation value, or return of premium without any surrender charges or penalties upon death." This language would seem to allow the insurer to choose which option to apply. Is this fair to the consumer? SB 426 (Leyva) Page 5 of ? 6. Suggested Amendments Amend the bill to clarify that the provisions of this bill only apply to annuity contracts issued on or after the effective date. 7. Prior and Related Legislation AB 2347 (Gonzalez, Ch. 166, Statutes of 2014) added immediate annuities to the insurance products that must include specified right of return and disclosure requirements when sold to individuals age 65 and older. POSITIONS Support California Department of Insurance (sponsor) California Advocates for Nursing Home reform Elder Financial protection Network California Health Advocates Congress of California Seniors Oppose None received -- END --