BILL ANALYSIS �
SENATE INSURANCE COMMITTEE
Senator Ronald Calderon, Chair
SB 599 (Kehoe) Hearing Date: April 27, 2011
As Amended: April 25, 2011
Fiscal: Yes
Urgency: No
SUMMARY Would provide life insurance proceeds are to be paid
in the form of a lump sum payment to a beneficiary or by another
option that has been clearly disclosed and, furthermore, that if
the beneficiary does not choose one of the available options, a
retained asset account may be the default option only with
specified disclosures; failure to comply is subject to the
Insurance Codes' Unfair Practices Act
.
DIGEST
Existing law
1.Specifies insurance upon life may be made payable various ways
including on the death of the insured. (CIC Section 10170)
2.Requires insurance companies not to knowingly misrepresent to
claimants pertinent facts or policy provisions relating to any
issues of coverage and under related regulations of the
Department of Insurance, insurers are required to disclose to
a beneficiary all benefits, coverage, time limits or other
provisions of the insurance policy. (CIC Sec. 790.03(h)(1)
and CCR Sec. 2695.4(a) of Title 10)
3.Provides that the relationship between the insurer and the
policyholder or beneficiaries under any agreement concerning
the terms and conditions for payment shall be that of debtor
and creditor and the insurer shall not be required to
segregate funds so held but shall hold them as a part of its
general corporate assets. (CIC Sec. 10170 (e))
4.Establishes the California Life and Health Guaranty
Association which provides a guarantee, in the event an
insurer going into default, of 80 percent of the defaulting
insurer's contractual obligations for each valid claim under a
policy or contract up to a maximum of 300,000 dollars in life
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insurance death benefits on any one life. (CIC Secs. 1067 et
seq., including 1067.02(c)(1), 1067.02(c)(2) (A)(i))
5.Provides that the CLHIGA coverage guarantee does not extend
to:
a. Any portion of a policy or contract not guaranteed
by the insurer, or under which the risk is borne by the
policy or contract owner. (CIC Sec. 1067.02(b)(2)(A))
b. An obligation that does not arise under the express
written terms of the policy or contract issued by the
insurer to the contract or policy owner, including, inter
alia, "claims based on side letters, riders, or other
documents that were issued by the insurer without meeting
applicable policy form filing or approval requirements".
(CIC Sec. 1067.02(J)(ii))
6.Sets payment-related ground rules applicable to life and
disability policies as follows:
a. An insurer may fully discharge its policy
obligations and avoid all claims under a life insurance
policy by making payment in accordance with the policy
terms and any applicable written agreements unless it
receives in its home office written notice of someone
else's claim on the proceeds. (CIC Sec. 10172)
b. An insurer may not withhold payment of money under a
life insurance policy for a period longer than reasonably
necessary to transmit payment and, whenever possible,
payment is to be made within 30 days of the death of the
insured. (CIC Sec. 10172.5 (b))
c. If payment is not made within 30 days of the death
of the insured, the insurer must pay interest, computed
from the date of death, after expiration of the 30 day
period at a rate not less than the current rate of
interest on death proceeds left with the insurer. (CIC
Sec. 10172.5 (a))
d. If a beneficiary elects in writing to receive the
proceeds by other than a lump sum payment, the insurer
does not have a statutory obligation to pay interest.
(But can, of course, enter into a contractual obligation)
(CIC Sec. 10172.5 (d))
This bill
SB 599 (Kehoe), Page 3
1.Defines:
a. "Lump-sum payment" as a single payment made directly
to the beneficiary that satisfies all of the benefits
owed to the beneficiary under a life insurance policy.
b. "Retained-asset account" to mean any mechanism
whereby the settlement of proceeds owed under a life
insurance policy is accomplished by the insurer, (or an
entity acting on its behalf), depositing those proceeds
into an account with check or draft writing privileges,
and where those proceeds are retained by the insurer
pursuant to a supplemental contract not involving
annuity benefits.
2.Life Insurance Payoff Choice: Provides all life insurance
proceeds shall be paid in a lump sum payment to the
beneficiary or by another method clearly disclosed in the
claim form. A beneficiary has the right to choose the method
of payment from among options that are available.
If no option is chosen, a retained asset account may be the
default only if the claim form provides a prominent disclosure
in easy to understand language, and bold and 12 point font
type, that informs the beneficiary that absent a choice, the
retained asset account will be the method of payment.
3.Rights of Group or Individual Policy Policyholders: If an
insurer offers or recommends the option to a policyholder of
an individual or group life insurance policy that their
beneficiary receive the policy proceeds in the form of a
retained asset account, or any arrangement other than a lump
sum payment, the insurer shall provide the policyholder with
written information, at the time the offer or recommendation
is made, written information describing each available option.
(Page 3, lines 9 to 16)
4.Rights of Beneficiary In Advance of a Claim: If, in advance of
the time a claim is made, an insurer offers or recommends to a
beneficiary that they receive the settlement proceeds as a
retained asset account or by any means other than a lump sum
payment, the insurer shall provide them with written
information describing each of the settlement options. (Page
3, lines 16 to 23)
5.Rights of a Beneficiary at the Time of a Claim: If, at the
time a claim is made, an insurer offers or recommends that the
beneficiary receive life insurance proceeds in the form of a
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retained asset account then the requirements of SB 713
regarding notice and disclosure apply and are required. (Page
3, lines 23 to 27)
6.The Unfair Fair Practices Act in the Insurance Code is made
expressly applicable to violations of this Act.
7.Authorizes regulations by the Commissioner pertaining to both
the subdivision (f) of Section 10170 which this bill adds but
also as to subdivision (e)which has not been materially
altered since 1949 and also with regard to Insurance Code
Section 10172.5 which this bill does not amend.
COMMENTS
1.Purpose of the bill according to the Author: SB 599 seeks to
ensure that policyholders and beneficiaries of life insurance
policies have an opportunity to decide if they want life
insurance proceeds paid out in the form of a Retained Asset
Account (RAA). Existing law permits insurers to require
beneficiaries to be paid life insurance proceeds only via an
RAA. Additionally, existing law enables insurers to provide
information to beneficiaries regarding their life insurance
proceeds in a manner that essentially results in the insurers
automatically establishing an RAA. RAAs have certain features
that can compromise consumer protection, profitability, and
accessibility.
2.Purpose according to the Department of Insurance (Sponsor):
This bill ensures that beneficiaries of life insurance
policies have an opportunity to decide how they want their
life insurance proceeds paid.
Many life insurance beneficiaries are unknowingly having their
insurance proceeds placed into Retained Asset Accounts (RAAs).
This is because existing law permits insurers to require
beneficiaries to receive their life insurance proceeds only
through an RAA. Additionally, existing law enables insurers
to provide information to beneficiaries regarding their
proceeds in a manner that essentially results in the insurers
automatically establishing an RAA. RAAs have certain features
that can compromise consumer protection and accessibility,
namely:
SB 599 (Kehoe), Page 5
RAAs are not traditional bank accounts and not
protected by the FDIC. Instead, they are protected by
State Guarantee Associations (SGA). SGA coverage
varies by state and is governed by the state in which
the beneficiary resides. Under the California Life
and Health Insurance Guarantee Association (CLHIGA), a
beneficiary's RAA is only guaranteed for 80 percent of
the amount up to a limit of $300,000. The FDIC
protects bank accounts for 100 percent of the amount
up to a limit of $250,000.
RAAs appear to be similar to checking accounts
because insurers provide beneficiaries with a draft
book. However, because not all retailers readily
accept the RAA drafts and some RAAs have minimum draft
amount requirements, the ability for consumers to
adequately access their funds is limited.
SB 599 requires insurers to obtain a beneficiary's expressed
written declaration as to preferred method of benefit payment.
If the beneficiary does not make a designation, RAAs may be
used as a default form of payment only if the claim form
clearly discloses that in the section of the form where
payment is selected. The bill also requires insurers to issue
the beneficiary with all RAA-related disclosures specified in
SB 713 (Calderon), which are similar, if not more heightened,
to the RAA-related disclosures endorsed by the National
Association of Insurance Commissioners (NAIC), in all cases,
whether by beneficiary choice or default, that an RAA is
established.
1. Background and Discussion:
a. Retained Asset Accounts are devices used by
some insurers as a means to provide life insurance
beneficiaries with full access to their funds through
a checking or draft account that permits them to both
earn some interest (it varies among insurers) and
maintain maximum liquidity; i.e. they can write a
check for the full amount of the funds at any time.
b. Concern for the extent of the consumer's
knowledge and awareness about RAA's arose last summer
when instances of difficulty cashing RAA payment
instruments arose. In response to this heightened
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visibility and concern, the National Association of
Insurance Commissioners promulgated a recommended
template for disclosure which included the requirement
that any RAA agreement be memorialized in a
supplementary contract as specified in subparagraph
(B) of paragraph (2) of Subdivision (f) of Section
10170.
c. When the policy of SB 599 is viewed from the
perspective of RAA's as potential investment vehicles,
the following observations can be made:
i. RAA's represent a type of holding
pen for life insurance proceeds is both highly
liquid (they can be zeroed out at any time) and
which pays interest - to some degree - from the
date of their establishment until the last dollar
is removed. To these financial attributes, RAA
couple the practical fact that the vehicle itself
offers these two advantages in a way that imposes
minimal demands on the bereaved until they are
past their grief.
ii. Financial Columnist Jane Bryant
Quinn expresses a qualified "approval" for the
benefit RAA's can provide "Retained-asset
accounts are a reasonable and convenient choice,
and will be better if better disclosed. But don't
leave the money there long. For long-term
support, you want the payout invested for higher
income and growth." See Online Column, Jane
Bryant Quinn, August 31, 2010, "Life insurance
payouts: Are you earning enough on the money?
iii. Once one recognizes that RAA's are
both high liquidity and interest-bearing demand
accounts, it is clear the pool of alternative
investment vehicles is small. Among highly liquid
spots to place funds, each has characteristics
that may be important to the depositor.
� Retained Asset Accounts
are by definition highly liquid and can be
closed at any time without penalty. While
they offer ease of use plus interest,
formalities of their establishment may be
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important to guaranty fund recognition in
the event of insurer insolvency.
� Certificates of Deposit
can offer higher yields but if the money is
withdrawn before maturity, a penalty
results.
� Money Market Accounts ,
while more flexible than CD's, may have
rules that affect their fitness for a given
beneficiary. These can include requirements
for minimum balances, or limits on the
frequency or dollar amount of checks.
� Checking and Savings
accounts may pay interest, but again program
rules will matter.
d. Regarding the risk of loss to the investor of
both principal and interest, while various banks and
credit unions will offer interest bearing checking
accounts that are FDIC or NCUA insured, a brief survey
of "investing" at well-known banks and credit unions
indicates they pass that money off to investment
partners which are neither insured or guaranteed.
Principal can be lost. This is true of Bank of
America, Wells Fargo, Chase Bank, and the Golden 1
Credit Union.
1. As amended, the bill acknowledges the differing legal
positions under a policy of life insurance of both
policyholders and their beneficiaries and also the differing
positions of the owners of individual versus group policies.
The staff to the author and sponsors have done a good job
articulating the intended policy which they are seeking to
establish in this area. Continued attention to the
respective positions of all of these parties in the
practicalities of the law's operation, including vis-�-vis
the state guaranty fund law will make sense.
2. Summary of Arguments in Support: Supporters, including
Consumer watchdog, have reviewed the bill as amended and
state they support the bill's requirement that life insurers
provide beneficiaries with a choice between a lump sum
payment and a retained asset account, with a prominent
SB 599 (Kehoe), Page 8
disclosure explaining the default method of payment if
beneficiaries fail to make a choice.
3. Other comments, based on the bill as introduced, stated:
a. Most consumers expect that if a claim is made
on a life insurance policy, the result should be a
check rather than a checkbook.
b. SB 599 offers insurance beneficiaries enhanced
protections in relation to current payout practices,
including preventing insurance companies from unfairly
using retained policy proceeds to accrue investment
benefits.
c. RAA monies are not insured by the Federal
Deposit Insurance Corporation (FDIC) and may not be
protected by state guaranty funds.
d. A checkbook, which is not the same as full
benefit payment, is a default feature of an RAA.
e. Some insurers have made it confusing or hard
for beneficiaries to access their RAA funds.
f. A substantial amount of RAA funds go unclaimed
4. Summary of Arguments in Opposition: Stating
"oppose unless amended" are the Allstate Insurance
Company, and the Association of California Life and
Health Insurance Companies (ACLHIC) which express
concern for how the disclosure requirements will mesh
with insurer internal processing practices. Both
parties, however, communicate an intention to continue
to work to resolve these concerns and acknowledge the
significant progress made.
5. Amendments: None
6. Prior and Related Legislation:
a. SB 713 (Calderon) of the 2011 Session proposes
adoption in California of the NAIC's model for RAA
Consumer disclosures which it adopted in 2010. If
RAA's remain in use in California whether in
accordance with the status quo or under rules such as
SB 599 proposes, a disclosure statute substantially
like SB 713 will be desirable.
SB 599 (Kehoe), Page 9
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
California Department of Insurance (Sponsor)
Congress of California Seniors (as introduced)
Consumer Attorneys of California, (CAOC) (as introduced)
Consumer Watchdog (as amended)
United Policyholders (as introduced)
Opposition
Allstate Insurance Company
Association of California Life and Health Insurance Companies,
(ACLHIC)
Consultant: Ken Cooley (916) 651-4110