BILL ANALYSIS Ó
-----------------------------------------------------------------
|SENATE RULES COMMITTEE | SB 426|
|Office of Senate Floor Analyses | |
|(916) 651-1520 Fax: (916) | |
|327-4478 | |
-----------------------------------------------------------------
THIRD READING
Bill No: SB 426
Author: Leyva (D)
Amended: 4/14/15
Vote: 21
SENATE INSURANCE COMMITTEE: 7-0, 4/8/15
AYES: Roth, Gaines, Berryhill, Hall, Liu, Mitchell, Wieckowski
NO VOTE RECORDED: Hernandez
SUBJECT: Annuities: cash surrender benefits
SOURCE: Author
DIGEST: This bill 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 accumulation value,
excluding any surrender charges or penalties upon death.
ANALYSIS:
Existing law:
1)Provides for the regulation of annuities contracts, including
minimum non-forfeiture amounts prior to maturity.
2)Requires all disability and life insurance policies or
certificates offered for sale to individuals 65 years of age and
older to include a 30-day "free look" period starting on receipt
of the policy or certificate.
SB 426
Page 2
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.
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.
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.
This bill:
1)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 accumulation value, excluding
any surrender charges or penalties upon death.
2)Applies only to contracts issued or delivered on or after
January 1, 2016.
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
SB 426
Page 3
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.
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 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.
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.
SB 426
Page 4
The Association of California Life and Health Insurance
Companies and the American Council of Life Insurers say the
overwhelming majority 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.
Prior Legislation
AB 2347 (Gonzalez, Chapter 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 years and older.
FISCAL EFFECT: Appropriation: No Fiscal
Com.:NoLocal: No
SUPPORT: (Verified 4/8/15)
California Department of Insurance
California Advocates for Nursing Home Reform
California Health Advocates
Congress of California Seniors
Elder Financial Protection Network
OPPOSITION: (Verified 4/8/15)
None received
ARGUMENTS IN SUPPORT: According to the California Department
of Insurance, this bill creates a best practice for insurers by
providing additional protections for seniors who purchase fixed,
SB 426
Page 5
deferred annuities. It prohibits companies from charging a
surrender penalty on the death benefit and requires 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.
Prepared by:Erin Ryan / INS. / (916) 651-4110
4/15/15 16:29:01
**** END ****