BILL ANALYSIS
AB 2066
Page 1
Date of Hearing: April 13, 2010
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
AB 2066 (Jones) - As Amended: April 7, 2010
As Proposed to be Amended
SUBJECT : SENIORS: ANNUITIES
KEY ISSUE : IN ORDER TO BETTER PROTECT SENIORS FROM FINANCIAL
HARM, BEFORE OBTAINING AN ANNUITY (WHICH IS A COMPLEX, LONG-TERM
INVESTMENT THAT MAY BE INAPPROPRIATE FOR MANY SENIORS) SHOULD
SENIORS BE PROVIDED WITH SPECIFIED DISCLOSURES AND SHOULD
CERTAIN ANNUITIES, SUCH AS THOSE IN WHICH THE SURRENDER PENALTY
PERIOD EXCEEDS THE SENIOR'S LIFE EXPECTANCY, BE PRESUMPTIVELY
IMPROPER?
FISCAL EFFECT : As currently in print this bill is keyed fiscal.
SYNOPSIS
Annuities are complex, long-term investments in which invested
funds may be unavailable for many years and withdrawal of funds
can incur substantial surrender penalties. Seniors, contends
the author, are often pushed into purchasing inappropriate
annuities by aggressive sales agents without understanding their
complex provisions and their potentially harmful financial
consequences. This bill seeks to protect seniors from investing
in unsuitable annuities by, among other things, requiring
insurers and agents to provide seniors with specified
disclosures, by declaring that certain annuities are
presumptively unsuitable, and by limiting surrender penalties.
This bill is supported by seniors and consumer advocacy
organizations and the County Welfare Directors Association, and
opposed by the insurance industry.
SUMMARY : Requires that seniors be provided with specified
disclosures before obtaining an annuity, presumptively limits
the sale of annuities to seniors in specified circumstances, and
limits the surrender penalty that can be charged to seniors.
Specifically, this bill :
1)Declares that annuities are complex long-term investments and
that seniors may purchase them without fully understanding
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their complexities. States that seniors are subject to
exploitation and that California has a responsibility to
protect seniors from harm during financial transactions.
States that California should protect the economic well-being
of seniors by requiring reasonable disclosure of annuity
features, limiting the sale of annuities in certain
circumstances, and limiting penalties that may be charged for
early surrender.
2)Requires insurers, brokers, agents and others engaged in the
transaction of insurance who offer to sell an annuity to a
senior to disclose to the senior all material facts and
features of the annuity that he or she knows or reasonably
should know are likely to affect the decision of the senior to
seek the annuity, including, but not limited to, the fact that
if the senior ever receives Medi-Cal benefits, the state will
become a beneficiary of certain annuities.
3)Requires an insurer, broker, agent and others engaged in the
transaction of insurance who offer to sell an annuity to a
senior to provide to the senior, in addition to all other
disclosures, a specified notice that must be fully completed,
and signed and initialed by the senior, the senior's spouse,
if any, and the insurer. The notice includes information on
the terms of the proposed annuity, any other annuities the
senior may have, the return rate, the senior's life
expectancy, and the commission and fees to be paid as the
result of the annuity purchase.
4)Provides that it is presumptively improper to sell an annuity
to a senior if:
a) The senior already has a reverse mortgage or combines
the annuity purchase with purchase of a reverse mortgage;
b) The senior has assets less than or equal to the Medi-Cal
resource allowance, as defined, or twice that limit if the
senior is married or a registered domestic partner;
c) The sale would result in the senior holding 50 percent
or more of his or her assets as annuities; or
d) The surrender penalty period of the annuity exceeds the
life expectancy of the senior, as provided.
5)Provides that the sale of an annuity to a senior without
complying with the disclosure requirements under #3, above, or
in any of the situations in #4, above, constitutes a violation
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of the seller's required duty of honesty, good faith and fair
dealing and constitutes financial abuse of a senior under the
Elder Abuse and Dependent Adult Civil Protection Act.
6)Requires that compensation paid to the broker or agent as a
result of the sale of the annuity must be paid on an annual
basis spread evenly over the surrender period of the annuity.
7)Prevents the surrender penalty for an annuity from exceeding
the lesser of:
a) The compensation paid to the insurance producer, as of
the time of surrender; or
b) The total compensation to be paid to the insurance
producer, less the amount already paid.
8)Defines senior as a person 65 years or older who resides in
California.
EXISTING LAW :
1)Generally regulates the sale of insurance to seniors,
including annuity products. Provides that insurers, brokers,
agents and others engaged in the transaction of insurance owe
a duty of honesty, good faith and fair dealing to seniors that
is in excess of any duty otherwise imposed under law, either
express or implied. (Insurance Code Section 785 et seq.
Unless otherwise noted, all further references are to the
Insurance Code.)
2)Requires a life insurance agent to provide specified
disclosures to seniors when selling insurance and annuities,
including, but not limited to:
a) Medi-Cal eligibility standards;
b) Treatment of monthly income from assets when a person
enters a nursing home as a Medi-Cal patient;
c) Community property and Medi-Cal; and
d) Personal and real property exemptions under Medi-Cal.
(Section 789.8.)
3)Prohibits sales of annuities to seniors if the purpose is to
affect Medi-Cal eligibility, under specified circumstances,
and permits the senior to rescind the contract if those
circumstances exist. (Section 789.9.)
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4)Establishes prohibitions on various sales techniques when a
senior is involved in the purchase of life insurance,
including annuities. (Section 789.10.)
5)Grants seniors 60 years of age or older a "30-day free look"
period for life insurance and annuity contracts and permits
cancellation without penalty during that period, with limited
exceptions. (Section 10127.10; see also Section 786.)
6)Provides, through the Elder Abuse and Dependent Adult Civil
Protection Act, civil remedies to victims of elder or
dependent adult abuse, neglect, abduction, including recovery
of damages and attorney's fees. (Welfare & Institutions Code
Section 15600 et seq.)
7)Provides that "financial abuse" occurs when a person takes,
secretes, appropriates, obtains, or retains real or personal
property of an elder or dependent adult by undue influence, as
defined. (Welfare & Institutions Code Section 15610.30.)
8)Requires a lender, prior to counseling regarding a reverse
mortgage, to provide a prospective borrower with a written
checklist pertaining to the risks and suitability of a reverse
mortgage. Requires further that the borrower and counselor
sign the checklist acknowledging that the items have been
discussed in counseling and the checklist be returned to the
lender, along with the required counseling certificate, prior
to closing. (Civil Code Sections 1923.2 and 1923.5.)
Comments : This bill seeks to protect seniors from investing in
unsuitable annuities by, among other things, requiring insurers
and agents to provide seniors with specified disclosures and by
declaring that certain annuities are presumptively unsuitable.
According to the author, seniors need more assistance when
considering annuities:
Seniors often live on fixed incomes, and have a
limited ability to recover from economic loss often
caused by unanticipated health problems. Seniors
often invade savings and liquidate assets to meet
these expenses, which can result in significant loss
and economic hardship.
Annuities are complex long term investments in which
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the invested dollars become unavailable for many years
and that the withdrawal of funds from annuities often
involves the payment of large surrender penalties and
the forfeiture of income and other benefits of the
investment.
Seniors often purchase annuities without understanding
their complex provisions and the implications of
withdrawing funds from the annuity.
While Annuities Can Provide Peace of Mind to Some Seniors, for
Others They Can Be Highly Inappropriate Investment Instruments :
Annuities require a greater level of sophistication and
education by the consumer than other insurance products. While
annuities can guarantee income for life and provide some seniors
with peace of mind, many people do not understand some of the
basic features of annuities, particularly deferred annuities.
Most deferred annuities contain surrender charges that limit the
purchaser's access to his or her money. These charges are
imposed if the money is withdrawn, and can be substantial. They
usually decrease over time but can last many years, even 20 or
more in some cases. Customers who purchase a back-end loaded
deferred annuity and then change their mind are essentially
locked in: They cannot get their money out without paying what
could be a very significant surrender charge. The consumer may
believe that they are getting a better return on an annuity, for
instance, versus a certificate of deposit. What they may not
understand is that while the early surrender on a certificate of
deposit may result in a subtraction from the interest, early
surrender of a deferred annuity may cause a deduction from the
principal.
Another concern is the inappropriate sales of deferred annuities
with surrender charges, essentially contracts designed to
provide tax-deferred savings for retirement, to senior citizens
who are already retired and who are already in very low income
tax brackets. Seniors sometimes invest their entire life
savings in these types of products, leaving them with no liquid
assets or income for years, which can be particularly
problematic if the senior needs access to his or her money
because of health problems or because other savings have been
significantly reduced in the economic collapse.
The Department of Insurance Warns Seniors That They May Be
Particularly Vulnerable to Exploitation Through Annuity Sales :
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The Department of Insurance (DOI), on its website, warns seniors
that they can be financially exploited through an unsuitable
annuity pushed by a manipulative agent:
As Baby Boomers start to retire, seniors are becoming
a major part of the population. Because many seniors
have worked all their lives, paid off their homes, and
put away money for retirement, they have assets that
make them a prime target for individuals that may seek
to exploit them financially. Elder abuse is a growing
problem that occurs daily in every community.
Financial abuse can drain elderly people of all their
life savings leaving them vulnerable when there is a
family emergency that require health care or long term
care. Illnesses such as dementia and Alzheimer's
often make it difficult for a person to ask for help
when confronted with financial problems.
Agents can make substantial commissions on the sale of
annuities. The majority of agents and brokers who
sell insurance products obey the laws. However, many
elderly individuals have been taken advantage of by
insurance agents who have manipulated them into
purchasing an unsuitable annuity or replacing existing
or established annuities with a new one simply for the
agent's financial gain.
This Bill Seeks to Protect Seniors From Inappropriate and
Potentially Financially Devastating Annuity Sales : This bill
seeks to protect seniors from financial abuse resulting from the
sale of inappropriate annuities in five distinct ways.
Required Disclosures: First, this bill requires that the
insurance agent must disclose to the senior all material facts
and features of the proposed annuity that the agent knows or
reasonably should know are likely to affect the senior's
decision to obtain the annuity, including that if the senior
ever receives Medi-Cal home or facility care, the state will
become a beneficiary of certain annuities purchased by the
senior. These disclosures should help ensure that the senior
has the necessary facts on which to base this very significant
financial decision.
In addition, the agent is required to provide the senior with a
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notice that must be fully completed, and signed and initialed by
the senior, the senior's spouse, if married, and the insurer.
The notice includes information on, among other things, the
seniors age and age at the end of the surrender period, the
terms of the senior's proposed annuity, any other annuities the
senior may have, the amount of fees and commissions to be paid
as a result of the sale, and the rate of return on the annuity,
as well as rates of return on United States Treasury
investments. Again, this information should provide the senior
with important information on which to base this very
significant decision.
Opponents argue that some of this information may not be
available to the senior or agent, the senior may not want to
share the information with the agent, or the information,
particularly regarding income counted for Medi-Cal purposes may
be confusing. Instead they suggest that it may be more
appropriate to use suitability standards developed by the
National Association of Insurance Commissioners (NAIC), which
are much more general and do not consider many of this bill's
disclosures, such as the senior's life expectancy, the surrender
penalty and the commission or fees to be paid to the agent.
Supporters counter that the information suggested by NAIC is too
general and will not ensure that the senior has all the
information he or she needs to make a decision of this
magnitude.
Proposed Amendments : The author acknowledges that several of
the provisions, particularly with regard to Medi-Cal countable
assets, could be confusing for some seniors and proposes the
following amendments to make the disclosure form easier to
understand:
On page 5, lines 6-7, delete "that are countable for Medi-Cal
purposes" and insert: , excluding your house, your retirement
accounts and one of your cars
On page 5, line 8, delete "Medi-Cal countable"
On page 5, between lines 8 and 9, insert: "- What is the
approximate value of each of your retirement accounts and are
you now receiving distributions from any of these accounts?
On page 5, lines 18-19, delete "that are countable for Medi-Cal
purposes" and insert: , excluding your house, your retirements
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accounts and one of your cars
On page 5, line 31, delete "any" and insert "your" [this is from
the health care professional line]
Certain Annuities Presumptively Improper: This bill creates a
presumption that it is improper to sell an annuity to a senior
to four situations:
1. The senior already has a reverse mortgage or combines
the annuity purchase with purchase of a reverse mortgage.
2. The senior has assets less than or equal to the Medi-Cal
resource allowance, as defined, or twice that limit if the
senior is married or a registered domestic partner;
3. The sale would result in the senior holding 50 percent
or more of his or her assets as annuities.
4. The surrender penalty period of the annuity exceeds the
life expectancy of the senior, as provided.
The bill does not prohibit the sale of an annuity in these four
situations, rather it creates a presumption, which can be
rebutted by a preponderance of the evidence, that such a sale of
an annuity in any of the above situations is improper.
Opponents content that the presumption effectively means that
insurers will not offer annuities in these four situations and
that, while for many seniors annuities in these situations will
be inappropriate, there are other situations, particularly with
respect to reverse mortgages, where such annuities would be
quite proper and seniors should have the ability to choose
freely, even if such an option is not ideal for them.
Supporters counter that since seniors are more subject to
financial abuse than the general population, the government has
a special obligation to protect them from harm and from making
what could be financially devastating decisions. Moreover, in
most of these four situations, the sale of an annuity will
indeed be detrimental to the senior. Aging Services of
California writes that "the bill correctly identifies
circumstances where the sale of an annuity to a senior is
improper. Each of the four instances identified as improper
raise[s] an important safeguard for seniors. Each such instance
has created major problems for seniors caught unaware of the
implications of being obligated to an annuity under the
circumstances identified as improper."
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However, there may be situations where this is not the case, and
the sale of an annuity in one of these four situations is
proper. This bill allows for the sale in those situations, but
if challenged, the insurer would need to rebut the presumption
that the sale of the annuity was presumptively improper.
Enforcement Provisions: Third, this bill provides that the sale
of an annuity to a senior without complying with the required
disclosure requirements or in any of the four presumptively
improper situations, discussed above, constitutes a violation of
the seller's required duty of honesty, good faith and fair
dealing and constitutes financial abuse of a senior under the
Elder Abuse and Dependent Adult Civil Protection Act. This
means that the DOI, a district attorney or an attorney
representing the duped senior may bring an action against the
insurer or agent.
Agent Compensation: Fourth, this bill seeks to align the
interests of the agent and the senior by requiring that
compensation the agent receives as a result of the sale of the
annuity must be paid on an annual basis spread evenly over the
surrender period of the annuity. This provision does not in any
way limit the compensation paid to the agent. It simply seeks
to prevent an early windfall to the agent at the expense of the
senior who must pay a significantly higher surrender rate early
on in order for the insurance company to recoup what it has
already paid to the agent. This provision is meant to apply
only to annuities with surrender penalties, but the language is
a little confusing. Therefore, the author has agreed to amend
the bill to clarify that this provision only applies to those
annuities.
Proposed Amendment : On page 7, line 25, delete "an" and insert:
"any"
On page 7, line 25, after "annuity" insert: "with a surrender
penalty"
On page 7, line 27, strike out "over the life of the annuity or
spread or trailed evenly"
Surrender Penalty: Finally, the bill limits the surrender
penalty that an insurance company may charge for an annuity to
the lesser of the compensation that has been paid to the agent
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at the time of surrender, and the total compensation to be paid
to the agent, less the amount already paid. This effectively
creates a surrender payment that begins low, is highest during
the middle period, and is low at the end. This can be best
explained with the following example: Suppose an agent is paid
a commission of $10,000 for selling an annuity and the surrender
period is 10 years. The agent would then be paid, under the
bill's fourth provision, $1,000 a year. The surrender penalty
over the ten years would be as follows:
-------------------------------------------
| |Compensation Paid to | Surrender |
| | Agent | Penalty |
|------+---------------------+--------------|
| Year | $1,000| $1,000|
| 1 | | |
|------+---------------------+--------------|
| Year | $2,000| $2,000|
| 2 | | |
|------+---------------------+--------------|
| Year | $3,000| $3,000|
| 3 | | |
|------+---------------------+--------------|
| Year | $4,000| $4,000|
| 4 | | |
|------+---------------------+--------------|
| Year | $5,000| $5,000|
| 5 | | |
|------+---------------------+--------------|
| Year | $6,000| $4,000|
| 6 | | |
|------+---------------------+--------------|
| Year | $7,000| $3,000|
| 7 | | |
|------+---------------------+--------------|
| Year | $8,000| $2,000|
| 8 | | |
|------+---------------------+--------------|
| Year | $9,000| $1,000|
| 9 | | |
|------+---------------------+--------------|
| Year | $10,000| $0|
| 10 | | |
-------------------------------------------
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ARGUMENTS IN SUPPORT : In support of the bill, the County
Welfare Directors Association of California writes:
While reports of abuse and neglect are generally
increasing as the population ages, financial abuse of
elder and dependent adults is particularly on the
rise. This form of abuse if often unreported, and the
results can be devastating. According to the Journal
of the American Medical Association, elder financial
abuse victims have a mortality rate three times higher
than seniors who are not victims of such abuse.
One common form of financial abuse is related to
inappropriate sales of investment products such as
annuities. While the annuity industry does have many
well-meaning, honest individuals, it unfortunately
also has unscrupulous salespeople who encourage the
purchase of inappropriate investment vehicles.
AB 2066 seeks to reduce the occurrence of elder
financial abuse by requiring reasonable disclosure of
annuity features, prohibiting the sale of annuities in
certain circumstances and limiting the surrender
penalties charged to senior annuitants.
Writes Aging Services of California: "AB 2066 is a much needed,
common sense approach to informing seniors about the
complexities and dangers of financial annuities. The disclosure
requirements are basic and long overdue. The check list is
essential to alert seniors to problems that are not immediately
apparent, but become life changing if certain facts materialize.
The checklist will help folks focus on potential problems and
develop ways to insulate themselves from any detrimental
developments."
Adds California Advocates for Nursing Home Reform: "Annuities
are complex financial arrangements that are sold through
commissions. The insurance companies give incentives to agents
to sell annuities that have maturity dates that are way into the
future. The rates of the commissions being offered to the
insurance agent increase with the longevity of the annuity
contract. Consequently, aggressive annuity sales persons are
talking seniors into purchasing annuities that, in some
instance, won't mature during their lifetime. Seniors who lock
up their money in annuities then later need it face exorbitant
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surrender penalties if they try to regain control over their
assets. . . . Seniors are lucrative and tempting targets for
sales persons who use high-pressure tactics, false or misleading
information, or simply intimidate the elder. AB 2066 is an
opportunity to protect seniors from being sold inappropriate
annuities."
ARGUMENTS IN OPPOSITION : The American Council of Life Insurers
and the Association of California Life and Health Insurance
Companies argue that annuities are often a good choice for
seniors and that this bill unreasonably restricts their sale:
This bill places onerous restrictions on annuities, a
particularly valuable retirement savings product that
is currently available to and popular among California
seniors. Annuities are sometimes unfairly criticized,
but the facts show they are extremely valuable in
helping Americans establish and build much needed
retirement savings and security. There are many
reasons why an annuity is a favorable retirement
savings product for consumers of all ages. They offer
a guaranteed and safe steam of income for life, a very
favorable tax benefit for both immediate and deferred
products, and a life insurance benefit for
beneficiaries. . .
The prohibitions contemplated in AB 2066 ignore the
many appropriate circumstances where the purchase of
an annuity is a good financial decision for the
individual, either in the short-term, the long-term,
or for their heirs. . . .
The National Association of Insurance and Financial Advisors of
California (NAIFA-California) opposes the bill because it "would
be detrimental to seniors seeking the safe and sound investment
of an annuity." Although "rogue agents and advisors continue to
do business in California" and that there are abusive practices
in the annuity marketplace "due to unscrupulous agents who
ignore suitability and compliance safeguards," NAIFA-California
argues that it has "contributed to efforts over the part several
years to bolster [the Department of Insurance's] ability to
protect consumers in the life and annuity marketplace" and that
"it is important to have a better understanding of the problems
in the marketplace before pursuing additional legislation that
could be very harmful to insurance agents and advisors who are
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providing valuable services to the communities."
It is important to note, however, that there is currently no
annuity suitability standard in statute today in California,
beyond just the very broad duty of honesty, good faith and fair
dealing. Additionally, the existing compliance safeguards are
only enforceable by the Department of Insurance or public
attorneys and, as a result, safeguards may well not be available
to protect most seniors.
Prior Legislation : AB 329 (Feuer), Chap. 236, Stats. 2009,
amends California reverse mortgage law to strengthen existing
counseling and cross-selling provisions and requires lenders to
provide the borrower with a checklist prior to counseling that
highlights the risks and alternatives to reverse mortgages.
AB 76 (Yamada), Chap. 75, Stats. 2009, extends the sunset date
of the Life and Annuity Customer Protection Fund administered by
DOI from January 1, 2010 to January 1, 2015. This bill also
requires the DOI to annually publish on its website a report
that consolidates designated statistics summarizing DOI's life
insurance and annuity consumer protection activities and
descriptions of departmental education programs for educating
consumers about such products, and their purchase, use and
related matters of consumer interest.
AB 267 (Calderon), 2007, would have required that agents or
insurers, when making a recommendation to a senior for the
purchase or exchange of an annuity have reasonable grounds for
believing that the recommendation is suitable for the senior.
Died in the Assembly Insurance Committee.
SB 192 (Scott), 2006, would have created suitability standards
for the sale of annuities and imposed new duties on insurers and
agent-brokers relative to the sale of these products to seniors.
Died in the Assembly Insurance Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
Aging Services of California
Area Agency on Aging for San Luis Obispo and Santa Barbara
Counties
AARP
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California Advocates for Nursing Home Reform
California Health Advocates
California Retired Teachers Association
Congress of California Seniors
County Welfare Directors Association of California
CSEA Retirees
Two individuals
Opposition
American Council of Life Insurers
Association of California Life and Health Insurance Companies
National Association of Insurance and Financial Advisors of
California
Analysis Prepared by : Leora Gershenzon / JUD. / (916) 319-2334