BILL ANALYSIS Ó
SENATE COMMITTEE ON INSURANCE
Senator Richard Roth, Chair
2015 - 2016 Regular
Bill No: SB 426 Hearing Date: April 8,
2015
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|Author: |Leyva |
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|Version: |February 25, 2015 |
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|Urgency: |No |Fiscal: |No |
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|Consultant:|Erin Ryan |
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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)
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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
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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
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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, or accumulation 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?
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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
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