BILL ANALYSIS Ó ----------------------------------------------------------------- |SENATE RULES COMMITTEE | SB 426| |Office of Senate Floor Analyses | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ----------------------------------------------------------------- UNFINISHED BUSINESS Bill No: SB 426 Author: Leyva (D) Amended: 6/16/15 Vote: 21 SENATE INSURANCE COMMITTEE: 7-0, 4/8/15 AYES: Roth, Gaines, Berryhill, Hall, Liu, Mitchell, Wieckowski NO VOTE RECORDED: Hernandez SENATE FLOOR: 36-0, 4/27/15 AYES: Allen, Anderson, Bates, Beall, Berryhill, Block, Cannella, De León, Fuller, Gaines, Galgiani, Hall, Hancock, Hernandez, Hertzberg, Hill, Hueso, Huff, Jackson, Lara, Leno, Leyva, Liu, McGuire, Mendoza, Mitchell, Monning, Morrell, Nguyen, Nielsen, Pan, Roth, Runner, Stone, Wieckowski, Wolk NO VOTE RECORDED: Moorlach, Pavley, Vidak ASSEMBLY FLOOR: 78-0, 7/2/15 (Consent) - See last page for vote SUBJECT: Annuities: cash surrender benefits SOURCE: California Department of Insurance 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. Assembly Amendments make technical and clarifying changes. SB 426 Page 2 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 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. 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 without any surrender charges or penalties upon death. 2)Applies only to contracts issued or delivered on or after SB 426 Page 3 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 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 two 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 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. SB 426 Page 4 According to the Association of California Life and Health Insurance Companies and the American Council of Life Insurers, 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 and older. FISCAL EFFECT: Appropriation: No Fiscal Com.:NoLocal: No SUPPORT: (Verified 7/2/15) California Department of Insurance (source) California Advocates for Nursing Home Reform California Health Advocates Congress of California Seniors Elder Financial Protection Network OPPOSITION: (Verified 7/2/15) 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. ASSEMBLY FLOOR: 78-0, 7/2/15 AYES: Achadjian, Alejo, Travis Allen, Baker, Bigelow, Bloom, Bonilla, Bonta, Brough, Burke, Calderon, Campos, Chang, Chau, Chávez, Chiu, Chu, Cooley, Cooper, Dababneh, Dahle, Daly, Dodd, Eggman, Frazier, Beth Gaines, Gallagher, Cristina Garcia, Eduardo Garcia, Gatto, Gipson, Gomez, Gonzalez, Gordon, Gray, Grove, Hadley, Harper, Roger Hernández, Holden, Irwin, Jones, Kim, Lackey, Levine, Linder, Lopez, Low, Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Mullin, Nazarian, Obernolte, O'Donnell, Olsen, Patterson, Perea, Quirk, Rendon, Ridley-Thomas, Rodriguez, Salas, Santiago, Steinorth, Mark Stone, Thurmond, Ting, Wagner, Waldron, Weber, Wilk, Williams, Wood, Atkins NO VOTE RECORDED: Brown, Jones-Sawyer Prepared by:Erin Ryan / INS. / (916) 651-4110 7/2/15 11:39:51 **** END **** SB 426 Page 6