BILL ANALYSIS �
SENATE JUDICIARY COMMITTEE
Senator Noreen Evans, Chair
2011-2012 Regular Session
SB 713 (Calderon)
As Amended April 28, 2011
Hearing Date: May 10, 2011
Fiscal: No
Urgency: No
TW
SUBJECT
Insurance: Proceeds: Disclosure
DESCRIPTION
This bill would establish the Life Insurance Proceeds Disclosure
Act of 2011, which would require life insurers to provide
disclosures regarding death settlement payment options,
including retained asset accounts, to policyholders and
beneficiaries, as specified. This bill would require the
insurer to provide to the beneficiary a supplemental contract
disclosing the rights of the beneficiary and obligations of the
insurer if the beneficiary chooses death settlement payment to
be placed into a retained asset account.
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.
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. (Evans,
Fallen Soldiers' Families Denied Cash as Insurers Profit,
Bloomberg (Jul. 28, 2010)
�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 599 (Kehoe, 2011), provides
disclosure language as well as disclosure procedures for
insurers. This bill, which focuses on disclosure requirements,
is the companion to SB 599.
This author-sponsored bill would require life insurers to
provide disclosures regarding death settlement payment options,
including retained asset accounts, to policyholders and
beneficiaries, as specified. This bill would require the
insurer to provide to the beneficiary a supplemental contract
disclosing the rights of the beneficiary and obligations of the
insurer if the beneficiary chooses death settlement payment to
be placed into a retained asset account.
CHANGES TO EXISTING LAW
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 may apply to the claim presented by the claimant.
(Cal. Code Regs., tit. 10, sec. 2695.4, subd. (a).)
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This bill would enact the Life Insurance Proceeds Disclosure Act
of 2011, which would establish disclosure standards for payment
of life insurance benefits to a beneficiary by means of a
retained asset account if a life insurance company offers
consumers a retained asset account or establishes such an
account as an alternative to the receipt of lump-sum payment
made directly to the beneficiary.
This bill would define "insurer" to mean an insurance company
that delivers or issues for delivery in this state any policy of
individual or group life insurance.
This bill would define "retained asset account" to mean any
mechanism where the settlement of proceeds payable under a life
insurance policy is accomplished by the insurer, or an entity
acting on behalf of the insurer, by depositing the 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.
This bill would require life insurers to provide the
beneficiaries, at the time a claim is made, written information
describing the settlement options available under the policy and
any other option available to the beneficiary for the receipt of
proceeds, including retained asset accounts, and how to obtain
specific details relevant to those options.
This bill would require the life insurer, if the insurer settles
the life insurance benefits through a retained asset account, to
provide the beneficiary with a supplemental contract that
clearly discloses the rights of the beneficiary and the
obligations of the insurer under the supplemental contract.
This bill would require the life insurer to provide the
following written disclosures to the beneficiary before the
retained asset account is established:
(a) payment of the full benefit is accomplished by
delivery of the draft book or checkbook;
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(b) one draft or check may be written to access the entire
amount, including interest, of the retained asset account
at any time;
(c) whether the available settlement options are
preserved until the entire balance is withdrawn or the
balance drops below the insurer's minimum balance
requirements;
(d) a statement identifying the account as either a checking
or draft account and an explanation of how the account
works, including, but not limited to, any minimum check or
draft amount requirements;
(e) information about the account services provided and
contact information where the beneficiary may request and
obtain more details about those services;
(f) a description of any fees charged, if applicable;
(g) the frequency of statements showing the current
account balance, the interest credited, drafts or checks
written, and any other account activity; the insurer would
be required to send the beneficiary at least one statement
per quarter, and a statement for any month in which there
has been account activity other than just the crediting of
interest;
(h) the minimum interest rate to be credited to the account
and how the actual interest rate will be determined;
(i) that the interest earned on the account may be
taxable;
(j) retained asset account funds held by insurance
companies are not guaranteed by the Federal Deposit
Insurance Corporation (FDIC), but are guaranteed by State
Guaranty Associations, and that the State Guaranty
Association coverage limits vary by state;
(k) a statement that advises the beneficiary to contact the
National Organization of Life and Health Insurance Guaranty
Associations (NOLHGA) to learn more about the coverage
limitations applicable to his or her account, and that
provides the beneficiary with the current Internet website
address and telephone number for NOLHGA; and
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(l) a description of the insurer's policy regarding
retained asset accounts that become inactive, including the
policy with respect to inactive accounts that are at risk
of escheating to the state pursuant to the California
Unclaimed Property Law.
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.
COMMENT
1. Stated need for the bill
The author writes:
Under current law, there �are] no specific statutory rules on
retained asset accounts �RAAs]. The alternative of RAA's for
settlement of a life insurance policy . . . emerged in the
1980's. This was a time when two factors in the U.S. economy
had people in a vise: 1) payment of interest by banks was
restricted under federal law, and yet 2) high inflation in the
U.S. economy was eroding the value of people's savings. In
this environment, the innovation represented by RAAs offered a
distinct advantage relative to the bank options available to
consumers.
�SB 713] �m]andates that the disclosures it sets forth be
provided to a beneficiary at the time of a claim under a life
insurance policy and before the RAA is selected or
established. It imposes requirements for at least a quarterly
statement to the beneficiary of the status of the funds in the
RAA account.
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.
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A Bloomberg article demonstrates how an RAA may benefit the
insurer more than the beneficiary. (Evans, Fallen Soldiers'
Families Denied Cash as Insurers Profit, Bloomberg (Jul. 28,
2010)
�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 ensure that persons whose life insurance proceeds
are being paid via an RAA know their rights with respect to this
account and . . . �receive] ongoing notices which alert them to
the availability of these funds."
The California Department of Insurance (CDI), which has not
taken a formal position on this bill, notes that this bill does
not require life insurers to disclose the amount of interest a
retained asset account would accrue at the time the claim
information is sent to the beneficiary. Rather, this bill only
would require life insurers to disclose the minimum amount of
interest the beneficiaries would receive on the proceeds in the
RAA. This disclosure would assist the beneficiary in deciding
whether the proceeds in the RAA were accruing interest at a rate
satisfactory to the beneficiary or whether another
interest-bearing account mechanism would be more beneficial.
However, the beneficiary, at the time he or she is deciding
whether or not to utilize the retained asset account option,
also should have information as to the actual amount of interest
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the retained asset account would accrue. For this reason, the
committee may wish to consider amending this bill to require the
insurer to disclose this information. CDI states it would be
able to support this bill if it was so amended.
Suggested amendment :
1. On page 4, line 15, replace "and" with","
2. On page 4, line 16, after "determined" insert ", and the
actual interest rate that would be credited as of the date
of the disclosure to a newly opened account"
3. Author's amendments
a. Declaratory language
This bill would declare that "a retained asset account . . .
can provide desired flexibility and fit the consumer's needs
and the needs of the consumer's family." This declaratory
language unnecessarily promotes the use of a retained asset
account. Accordingly, the author has agreed to accept an
amendment to strike this language.
b. Retained asset account statements
This bill would require an insurer to send the beneficiary at
least one statement per quarter, and a statement for any month
in which there has been account activity other than just the
crediting of interest. Although this language is provided
under a list of required disclosures contained in this bill,
this provision is substantive and therefore should be provided
as a requirement under its own section. Accordingly, the
author has agreed to accept an amendment to require, under a
separate statute, the insurer to provide these statements.
Suggested amendments :
1. On page 2, line 19, strike "that"
2. On page 2, strike lines 20-21
3. On page 3, line 28 after "10509.936" insert "If the life
insurance benefits are placed in a retained asset account,
the insurer shall send the beneficiary at least one
statement per quarter, and a statement for any month in
which there has been account activity other than just the
crediting of interest.
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10509.937"
4. On page 4, line 34, replace "10509.937" with "10509.938"
Support : Liberty Mutual Group; Metropolitan Life Insurance
Company; Pacific Life Insurance Company
Opposition : None Known
HISTORY
Source : Author
Related Pending Legislation : See Background.
Prior Legislation : AB 786 (Jones, 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 Committee where it was held.
Prior Vote : Senate Committee on Insurance (Ayes 8, Noes 0)
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