BILL ANALYSIS �
SENATE JUDICIARY COMMITTEE
Senator Noreen Evans, Chair
2011-2012 Regular Session
SB 599 (Kehoe)
As Amended April 25, 2011
Hearing Date: May 3, 2011
Fiscal: Yes
Urgency: No
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SUBJECT
Life Insurance: Retained Asset-Accounts
DESCRIPTION
This bill would require life insurers to provide beneficiaries
with settlement options on the life insurance benefit claim
form. This bill would authorize a retained asset account to be
the default method of settlement payment provided that the claim
form provides a prominent disclosure, as specified, that the
retained-asset account will be the default payment mechanism if
no other option is selected by the beneficiary. This bill would
require that a life insurer who recommends to a policyholder or
beneficiary that the beneficiary receive life insurance proceeds
in the form of a retained-asset account or any arrangement other
than a lump-sum payment provide in writing to the policyholder
or beneficiary the terms of each settlement option. This bill
would provide definitions for "lump-sum payment" and
"retained-asset account," as specified. This bill also would
authorize the Insurance Commissioner to adopt regulations
specifying reasonable requirements for the form agreements and
written disclosures required under this bill.
BACKGROUND
A retained-asset account (RAA) is an interest-bearing money
market checking account that is established by an insurer for
the beneficiary of a life insurance policy, and into which the
insurer deposits the policy's death benefit. Insurers are
increasingly defaulting to depositing beneficiary insurance
settlement payments into RAAs, which are not FDIC insured.
(more)
SB 599 (Kehoe)
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Last year, the life insurance industry came under fire for
paying life insurance benefits to families of deceased soldiers
into RAAs. These RAAs accrue interest, some of which is
distributed to the beneficiary, but much of the interest is
distributed to the insurer maintaining the account. (David
Evans, Fallen Soldiers' Families Denied Cash as Insurers Profit,
Bloomberg (Jul. 28, 2010)
http://www.bloomberg.com/news/2010-07-28/fallen-soldiers-families
-denied-cash-payout-as-life-insurers-boost-profit.html as of
Apr. 23, 2011.)
The California Department of Insurance (CDI) participates in an
insurance regulator accreditation program developed by the
National Association of Insurance Commissioners (NAIC). This
accreditation program provides uniformity among the member state
insurance departments as well as consumer protections.
Periodically, NAIC develops uniform insurance standards which
are included in NAIC's model laws.
After the media fallout regarding retained asset accounts
maintained by insurers, the NAIC began drafting revisions to its
retained asset account bulletin in order to provide for better
consumer protection. In December 2010, NAIC adopted a sample
bulletin which provided minimum disclosures by insurers
regarding the use of RAAs. This bulletin contains disclosure
language which the NAIC recommends to be adopted by each member
state. Another measure, SB 713 (Calderon, 2011), provides most
of these recommended disclosures. This bill differs from SB 713
in that, although it provides disclosure language, this bill
also provides disclosure procedures for insurers.
This bill would establish procedures to be followed by insurers
when making settlement claims to beneficiaries. This bill would
authorize an RAA to be the default method of settlement payment
as long as the settlement claim form provides a prominent
disclosure, as specified, that the RAA will be the default if no
other option is selected by the beneficiary. This bill also
would require that a life insurer who recommends to a
policyholder or beneficiary that the beneficiary receive life
insurance proceeds in the form of an RAA or any arrangement
other than a lump-sum payment provide in writing to the
policyholder or beneficiary the terms of each settlement option.
CHANGES TO EXISTING LAW
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Existing law prohibits insurers from knowingly misrepresenting
to claimants pertinent facts or insurance policy provisions
relating to any insurance coverage. (Ins. Code Sec.
790.03(h)(1).)
Existing law requires an insurer to disclose to a first party
claimant or beneficiary that all benefits, coverage, time
limits, or other provisions of any insurance policy issued by
that insurer that may apply to the claim presented by the
claimant. (Cal. Code Regs., tit. 10, sec. 2695.4, subd. (a).)
This bill would provide that all life insurance benefits shall
be paid in the form of a lump-sum payment to the beneficiary or
by another settlement option that is clearly described on the
benefit claim form.
This bill would authorize a retained asset account (RAA) to be
the default method of settlement payment only if the claim form
provides a prominent disclosure, in easy to understand language
set in bold and at least 12-point font, to the beneficiary that,
in the absence of the beneficiary choosing a settlement option,
payment of the policy benefits shall be made into an RAA.
This bill would require that a life insurer who recommends to a
policyholder or beneficiary that the beneficiary receive life
insurance proceeds in the form of an RAA or any arrangement
other than a lump-sum payment provide in writing to the
policyholder or beneficiary the terms of each settlement option.
This bill would define "lump-sum payment" to mean a single
payment made directly to the beneficiary that satisfies all of
the benefits owed to the beneficiary.
This bill would define "retained-asset account" to mean any
mechanism whereby the settlement proceeds payable under a life
insurance policy are deposited 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.
This bill would provide that an insurer that fails to conform to
the requirements under this bill would be in violation of
existing law prohibiting unfair methods of competition and
unfair and deceptive acts or practices.
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This bill would authorize the Insurance Commissioner to adopt
regulations specifying reasonable requirements for the form
agreements and written disclosures required under this bill.
COMMENT
1. Stated need for the bill
The author writes:
Beneficiaries are not always emotionally prepared to determine
a secure place to deposit life insurance payouts following the
loss of a loved one. Recognizing that situation, several life
insurance companies automatically deposit beneficiaries'
payouts into a Retained Asset Account (RAA). While an RAA
does provide some favorable options for beneficiaries, there
are some concerning aspects of RAAs. . . . �A] little known
aspect of RAAs allows insurers to use the proceeds to accrue
investment benefits to insurers themselves. Those benefits
often produce profits for insurers in excess of the investment
benefits that insurers distribute to the beneficiaries whose
funds are deposited in RAAs.
Beneficiaries of veterans and active duty service members have
been disproportionately exposed to the good and bad sides of
RAAs. The insurer providing the U.S. Department of Veterans
Affairs (V.A.) group life insurance coverage uses RAAs as
their default payout distribution mechanism for all lump-sum
settlements. A beneficiary will not receive a lump sum payout
without proactively requesting one.
The California Department of Insurance (CDI), the sponsor of
this bill, writes:
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.
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SB 599 preserves consumer choice and ensures beneficiaries are
made aware of how their benefits will be paid if they fail to
make a payment designation on their claim form.
2. Providing settlement payment disclosures for consumer
protection
This bill would require insurers to inform life insurance
policyholders and beneficiaries of death benefit settlement
options. Existing law does not require insurers to make
policyholders and beneficiaries aware of life insurance death
settlement payment options. Accordingly, insurers can pay life
insurance benefits into an RAA, which can accrue interest for
the benefit of the insurers. RAAs are maintained by the insurer
and not held at banks or FDIC insurers.
A Bloomberg article demonstrates how an RAA may benefit the
insurer more than the beneficiary. (David Evans, Fallen
Soldiers' Families Denied Cash as Insurers Profit, Bloomberg
(Jul. 28, 2010)
http://www.bloomberg.com/news/2010-07-28/fallen-soldiers-families
-denied-cash-payout-as-life-insurers-boost-profit.html as of
Apr. 23, 2011.) The mother of a fallen soldier was paid
$400,000 in death benefits, which was placed into an RAA. The
insurer, Prudential Financial, Inc., which provides group life
insurance for the Department of Veterans Affairs, sent to the
mother a package with information on the death benefit
settlement. This package contained checks which could be drawn
against the "convenient interest bearing account." The mother,
believing the checks could be used like normal bank account
checks, attempted to write two different checks against the RAA
at two different retailers, but these retailers did not accept
RAA checks for payment. The article notes that while the mother
was paid one percent interest on the RAA, the insurer earned a
4.8 percent return on this account. Prudential uses RAAs as the
default settlement payment mechanism.
The National Association of Insurance Commissioners (NAIC)
recognized the lack of consumer protection regarding RAAs and
issued a sample bulletin in December 2010, which recommends RAA
disclosures to be used by life insurers. In conjunction with
the NAIC recommendations, the author argues that this bill is
necessary to provide consumers with information so that they can
make the best decision on how they should receive death
settlement payments.
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Consumer Attorneys of California, a supporter of this bill,
argues that consumers are unaware that RAA checks do not
function in the same way as cash, and retailers have refused to
accept RAA checks. Consumers are not given adequate information
on how settlement payments placed in an RAA can be accessed.
Further, "�i]ndividuals who purchase insurance policies
generally expect that they will be paid in lump sum form. The
law governing payouts should more closely resemble this
expectation."
Association of California Life and Health Insurance Companies
expressed concern that the bill, as introduced, prohibited the
use of the RAA settlement payment mechanism unless the
policyholder or beneficiary requested the RAA in writing. To
address this concern, the bill was amended to allow RAAs to be
the default payment mechanism as long as the beneficiary or
policyholder is provided with a prominent disclosure that, in
the absence of a choice of payment made by the beneficiary, the
RAA may be the payment mechanism. The amendment removed all
opposition from this bill. This bill would allow insurers to
maintain the default RAA settlement payment option while making
sure consumers have adequate information as to other settlement
payment options.
Support : Allstate Insurance Company; Association of California
Life and Health Insurance Companies; Congress of California
Seniors; Consumer Attorneys of California; Consumer Watchdog;
United Policyholders
Opposition : None Known
HISTORY
Source : California Department of Insurance
Related Pending Legislation : SB 713 (Calderon) would require
life insurers to provide beneficiaries with written disclosures
regarding retained asset accounts. This bill is in this
Committee.
Prior Legislation : AB 786 (2010) would have required insurers
to provide disclosures to beneficiaries regarding retained asset
accounts. This bill was gutted and amended with these
provisions on the Senate Floor and referred to the Senate Rules
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Committee where it was held.
Prior Vote : Senate Committee on Insurance (Ayes 5, Noes 3)
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