Amended in Senate June 19, 2014

Amended in Assembly April 7, 2014

California Legislature—2013–14 Regular Session

Assembly Bill No. 2578

Introduced by Assembly Member Dababneh

February 21, 2014

An act to amend Sections begin delete 10271 and 10295.6 end delete begin insert 10271, 10271.1, 10295.6, and 10295.15 end insert of the Insurance Code, relating to insurance.

LEGISLATIVE COUNSEL’S DIGEST

AB 2578, as amended, Dababneh. Insurance: disability insurance: life insurance: accelerated death benefit.

Existing law governs the business of insurance, and defines various types of insurance for these purposes, including life insurance and disability insurance. Existing law generally makes the requirements imposed on disability insurance contracts inapplicable to life insurance, endowment, and annuity contracts, or supplemental contracts thereto, that provide supplemental benefits in case of death or dismemberment or loss of sight by accident, operate to safeguard contracts against lapse, or give a special surrender benefit or an accelerated death benefit, as specified. begin insert Existing law requires that the supplemental benefit provide that the insurer may require that the insured provide written proof of occurrence or loss no less than 90 days after the termination of the period for which the insurer is liable, and, in the case of claim for any other occurrence or loss, within 90 days after the date of the occurrence or loss. end insert Existing law begin insert also end insert requires that supplemental benefits specify any applicable exclusions and limits those exclusions to, among other things, a condition or loss caused by engaging in an illegal occupation.

This bill would begin insert instead require that the supplemental benefit provide that the insurer may require, in the case of a claim for which the supplemental benefit provides any periodic payment contingent upon continuing occurrence or loss, that the insured provide written proof of occurrence or loss no less than 90 days after the termination of the period for which the insurer is liable, and, in the case of claim for any other occurrence or loss, that the insured provide written proof of occurrence or loss within 90 days after the date of the occurrence or loss. The bill would also end insert include a condition or loss caused or substantially contributed to by engaging in aviation, other than as a fare-paying passenger, to the list of allowable exclusions to supplemental benefits.

begin insert

Existing law provides that supplemental benefits that operate to safeguard life insurance contracts against lapse are defined as a waiver of premium benefit or a waiver of monthly deduction benefit, as applicable, in which the insurer waives the premium or monthly deduction for a life insurance contract when the insured becomes totally disabled, as defined by the supplemental benefit, and where the waiver continues until the end of the insured’s disability, or for the period specified by the supplemental benefit, consistent with specified requirements. Under those requirements, the waiver of premium or monthly deduction benefit continues for the period specified by the supplemental benefit, but may not be less favorable to the insured than certain terms, including that if the insured’s total disability begins before the insured attains 60 years of age, that the insurer waive all premiums or monthly deductions due for the period of the total disability, and if the total disability extends to the insured’s attainment of 65 years of age, that the insurer waive all further premiums or monthly deductions due.

end insert begin insert

This bill would change the above terms by instead requiring the insurer, if the insured’s total disability begins before the insured attains 60 years of age, to waive all premiums or monthly deductions due for the period that the insured continues to be totally disabled.

end insert

Existing law defines an accelerated death benefit as a provision, endorsement, or rider added to a life insurance policy that provides for the advance payment of any part of the death proceeds, payable upon the occurrence of a qualifying event, as provided. The insurer is required to provide the policyholder or certificate holder with a report, at least monthly, of any accelerated death benefits paid out during the prior month, an explanation of any changes to the policy or certificate, death benefits, and cash values on account of the benefits being paid out, and the amount of the remaining benefits that can be accelerated at the end of the prior month.

This bill would begin insert require the insurer to provide the report no less than one month after the payment of the benefit, and would end insert delete the requirement that the report be provided on a monthly basis.

begin insert

Existing law requires term life insurance policies to include a prominent statement on page one that the accelerated death benefit terminates with the policy.

end insert begin insert

This bill would instead require, if an accelerated death benefit is offered with an underlying term life insurance policy, that the accelerated death benefit include the required statement that the benefit terminates with the policy.

end insert

Vote: majority. Appropriation: no. Fiscal committee: no. State-mandated local program: no.

The people of the State of California do enact as follows:

SECTION 1.  

Section 10271 of the Insurance Code is amended
to read:

10271.  

(a) Except as set forth in this section, this chapter shall
not apply to, or in any way affect, provisions in life insurance,
endowment, or annuity contracts, or contracts supplemental thereto,
that provide additional benefits in case of death or dismemberment
or loss of sight by accident, or that operate to safeguard those
contracts against lapse, as described in subdivision (a) of Section
10271.1, or give a special surrender benefit, as defined in
subdivision (b) of Section 10271.1, or an accelerated death benefit
as defined in Article 2.1 (commencing with Section 10295), in the
event that the owner, insured, or annuitant, as applicable, meets
the benefit triggers specified in the life insurance or annuity
contract or supplemental contract.

(b) For the purposes of this section, the term “supplemental
benefit” means a rider to or provision in a life insurance policy,
certificate, or annuity contract that provides a benefit as set forth
in subdivision (a).

(c) A supplemental benefit described in subdivision (a) shall
contain all of the following provisions. However, an insurer, at its
option, may substitute for one or more of the provisions a
corresponding provision of different wording approved by the
commissioner that is not less favorable in any respect to the owner,
insured, or annuitant, as applicable. The required provisions shall
be preceded individually by the appropriate caption, or, at the
option of the insurer, by the appropriate individual or group
captions or subcaptions as the commissioner may approve.

(1) A life insurance policy or annuity contract that contains a
supplemental benefit shall provide that the contract, supplemental
contract, and any papers attached thereto by the insurer, including
the application if attached, constitute the entire insurance or annuity
contract and shall also provide that no agent has the authority to
change the contract or to waive any of its provisions. This provision
shall be preceded individually by a caption stating “ENTIRE
CONTRACT; CHANGES:” or other appropriate caption as the
commissioner may approve.

(2) The supplemental benefit shall provide that reinstatement
of the supplemental benefit shall be on the same or more favorable
terms as reinstatement of the underlying life insurance policy or
annuity contract. Following reinstatement, the insured and insurer
shall have the same rights under reinstatement as they had under
the supplemental benefit immediately before the due date of the
defaulted premium, subject to any provisions endorsed in the rider
or endorsement or attached to the rider or endorsement in
connection with the reinstatement. This reinstatement provision
shall be preceded individually by a caption stating
“REINSTATEMENT:” or other appropriate caption as the
commissioner may approve.

(3) A supplemental benefit subject to underwriting shall include
an incontestability statement that provides that the insurer shall
not contest the supplemental benefit after it has been in force during
the lifetime of the insured for two years from its date of issue, and
that the supplemental benefit may only be contested based on a
statement made in the application for the supplemental benefit, if
the statement is attached to the contract and if the statement was
material to the risk accepted or the hazard assumed by the insurer.
This provision shall be preceded individually by a caption stating
“INCONTESTABILITY:” or other appropriate caption as the
commissioner may approve.

(4) The supplemental benefit shall provide either that the insurer
may accept written notice of claim at any time or that the insurer
may require that written notice of claim be submitted by a due date
that is no less than 20 days after an occurrence covered by the
supplemental benefit, or commencement of any loss covered by
the supplemental benefit, or as soon after the due date as is
reasonably possible. Notice given by or on behalf of the insured
or the beneficiary, as applicable, to the insurer at the insurer’s
address or telephone number, or to any authorized agent of the
insurer, with information sufficient to identify the insured, shall
be deemed notice to the insurer. This provision shall be preceded
individually by a caption stating “NOTICE OF CLAIM:” or other
appropriate caption as the commissioner may approve.

(5) The supplemental benefit shall provide that the insurer, upon
receipt of a notice of claim, shall furnish to the claimant those
forms as are usually furnished by it for filing a proof of occurrence
or a proof of loss. If the forms are not furnished within 15 days
after giving notice, the claimant shall be deemed to have complied
with the requirements of the supplemental benefit as to proof of
occurrence or proof of loss upon submitting, within the time fixed
by the supplemental benefit for filing proof of occurrence or proof
of loss, written proof covering the character and the extent of the
occurrence or loss. This provision shall be preceded individually
by a caption stating “CLAIM FORMS:” or other appropriate
caption as the commissioner may approve.

(6) The supplemental benefit shall provide that the insurer may
require begin insert , in the case of a claim for which the supplemental benefit
provides any periodic payment contingent upon continuing
occurrence or loss, end insert that the insured provide written proof of
occurrence or proof of loss no less than 90 days after the
termination of the period for which the insurer is liable, and, in
the case of claim for any other occurrence or loss, begin insert that the insured
provide written proof of occurrence or proof of loss end insert within 90 days
after the date of the occurrence or loss. Failure to furnish proof
within the time required shall not invalidate or reduce the claim if
it was not reasonably possible to give proof within the time,
provided proof is furnished as soon as reasonably possible and,
except in the absence of legal capacity, no later than one year from
the time proof is otherwise required. This provision shall be
preceded individually by a caption stating “PROOF OF LOSS:”
or other appropriate caption as the commissioner may approve.

(7) The supplemental benefit shall provide that the insurer, at
its own expense, shall have the right and opportunity to examine
the person of the insured when and as often as the insurer may
reasonably require during the pendency of a claim and to make an
autopsy in case of death where it is not forbidden by law. This
provision shall be preceded individually by a caption stating
“PHYSICAL EXAMINATIONS:” or other appropriate caption
as the commissioner may approve.

(d) The commissioner shall not approve any contract or
supplemental contract for insurance or delivery in this state if the
commissioner finds that the contract or supplemental contract does
any of the following:

(1) Contains any provision, label, description of its contents,
title, heading, backing, or other indication of its provisions that is
unintelligible, uncertain, ambiguous, or abstruse, or likely to
mislead a person to whom the supplemental benefit is offered,
delivered, or issued.

(2) Constitutes fraud, unfair trade practices, or insurance
economically unsound to the owner, insured, or annuitant, as
applicable.

(3) Contains any actuarial information that is materially
incomplete, incorrect, or inadequate.

(e) A supplemental benefit described in subdivision (a) shall
not contain any title, description, or any other indication that would
describe or imply that the supplemental benefit provides long-term
care coverage.

(f) Commencing two years from the date of the issuance of the
supplemental benefit, no claim for loss incurred or disability, as
defined by the supplemental benefit, may be reduced or denied on
the grounds that a disease or physical condition not excluded from
coverage by name or specific description effective on the date of
loss had existed prior to the effective date on the coverage of the
supplemental benefit.

(g) With regard to supplemental benefits set forth in subdivision
(a), the supplemental benefit shall specify any applicable
exclusions, which shall be limited to the following:

(1) Condition or loss caused or substantially contributed to by
any attempt at suicide or intentionally self-inflicted injury, while
sane or insane.

(2) Condition or loss caused or substantially contributed to by
war or an act of war, as defined in the exclusion provisions of the
contract.

(3) Condition or loss caused or substantially contributed to by
active participation in a riot, insurrection, or terrorist activity.

(4) Condition or loss caused or substantially contributed to by
committing or attempting to commit a felony.

(5) Condition or loss caused or substantially contributed to by
voluntary intake of either:

(A) Any drug, unless prescribed or administered by a physician
and taken in accordance with the physician’s instructions.

(B) Poison, gas, or fumes, unless they are the direct result of an
occupational accident.

(6) Condition or loss in consequence of the insured being
intoxicated, as defined by the jurisdiction where the condition or
loss occurred.

(7) Condition or loss caused or substantially contributed to by
engaging in an illegal occupation.

(8) Condition or loss caused or substantially contributed to by
engaging in aviation, other than as a fare-paying passenger.

(h) If the commissioner notifies the insurer, in writing, that the
filed form or actuarial information does not comply with the
requirements of law and specifies the reasons for his or her opinion,
it is unlawful for an insurer to issue any policy in that form.

begin insert

begin insert SEC. 2. end insert   

end insert

begin insert Section 10271.1 of the end insert begin insert Insurance Code end insert begin insert is amended to
read: end insert

10271.1.  

(a) (1) Supplemental benefits that operate to
safeguard life insurance contracts against lapse are defined as a
waiver of premium benefit or a waiver of monthly deduction
benefit, as applicable, in which the insurer waives the premium or
monthly deduction for a life insurance contract when the insured
becomes totally disabled, as defined by the supplemental benefit,
and where the waiver continues until the end of the insured’s
disability, or for the period specified by the supplemental benefit,
consistent with paragraph (5).

(2) For purposes of this subdivision, total disability shall not be
less favorable to the insured than the following:

(A) During the first 24 months of total disability, the insured is
unable to perform with reasonable continuity the substantial and
material duties of his or her job due to sickness or bodily injury.

(B) After the first 24 months of total disability, the insured, due
to sickness or bodily injury, is unable to engage with reasonable
continuity in any other job in which he or she could reasonably be
expected to perform satisfactorily in light of his or her age,
education, training, experience, station in life, or physical and
mental capacity.

(3) The definition of total disability may also include
presumptive total disability, such as the insured’s total and
permanent loss of sight of both eyes, hearing of both ears, speech,
the use of both hands, both feet, or one hand and one foot.

(4) The insurer may require total disability to continue for an
uninterrupted period of time specified by the supplemental benefit,
or the insurer may allow separate periods of disability to be
combined.

(5) The waiver of premium or monthly deduction benefit shall
continue for the period specified by the supplemental benefit, but
shall not be less favorable to the insured than the following:

(A) If the insured’s total disability begins before the insured
attains 60 years of age, the insurer shall waive all premiums or
monthly deductions due for the period begin delete of the total disability, and
if the total disability extends to the insured’s attainment of 65 years
of age, the insurer shall waive all further premiums or monthly
deductions due. end delete begin insert that the insured continues to be totally disabled. end insert

(B) If the insured’s total disability begins after the age specified
in subparagraph (A), the insurer shall waive all premiums or
monthly deductions due for the period that the insured continues
to be totally disabled up to 65 years of age.

(6) In addition to the permissible exclusions listed in subdivision
(g) of Section 10271, the insurer may exclude a total disability
occurring after the policy anniversary or supplemental contract
anniversary, as applicable and as defined by the supplemental
benefit, on which the insured attains a specified age of no less than
65 years.

(b) “Special surrender benefit” is defined as a “waiver of
surrender charge benefit” wherein the insurer waives the surrender
charge usually charged for a withdrawal of funds from the cash
value of a life insurance contract or the account value of an annuity
contract if the owner, insured, or annuitant, as applicable, meets
any of the following criteria:

(1) Develops any medical condition where the owner’s,
insured’s, or annuitant’s life expectancy is expected to be less than
or equal to a limited period of time that shall not be restricted to
a period of less than 12 months or greater than 24 months.

(2) Is receiving, as prescribed by a physician, registered nurse,
or licensed social worker, home care or community-based services,
as defined in subdivision (a) of Section 10232.9, or is confined in
a skilled nursing facility, convalescent nursing home, or extended
care facility, which shall not be defined more restrictively than as
in the Medicare program, or is confined in a residential care facility
or residential care facility for the elderly, as defined in the Health
and Safety Code. Out-of-state providers of services shall be defined
as comparable in licensure and staffing requirements to California
providers.

(3) Has any medical condition that would, in the absence of
treatment, result in death within a limited period of time, as defined
by the supplemental benefit, but that shall not be restricted to a
period of less than six months.

(4) Is totally disabled, as follows:

(A) During the first 24 months of total disability, the owner,
insured, or annuitant, as applicable, is unable to perform with
reasonable continuity the substantial and material duties of his or
her job due to sickness or bodily injury.

(B) After the first 24 months of total disability, the owner,
insured, or annuitant, as applicable, due to sickness or bodily injury,
is unable to engage with reasonable continuity in any other job in
which he or she could reasonably be expected to perform
satisfactorily in light of his or her age, education, training,
experience, station in life, or physical and mental capacity.

(C) The definition of total disability may also include
presumptive total disability, such as the insured’s total and
permanent loss of sight of both eyes, hearing of both ears, speech,
the use of both hands, both feet, or one hand and one foot.

(D) The insurer may require the total disability to continue for
an uninterrupted period of time specified by the supplemental
benefit, or the insurer may allow separate periods of disability to
be combined.

(5) Has a chronic illness as defined pursuant to either
subparagraph (A) or (B):

(A) Either of the following:

(i) Impairment in performing two out of seven activities of daily
living, as set forth in subdivisions (a) and (g) of Section 10232.8,
meaning the insured needs human assistance, or needs continual
substantial supervision.

(ii) The insured has an impairment of cognitive ability, meaning
a deterioration or loss of intellectual capacity due to mental illness
or disease, including Alzheimer’s disease or related illnesses, that
requires continual supervision to protect oneself or others.

(B) Either of the following:

(i) Impairment in performing two out of six activities of daily
living as described in subdivisions (b), (d), (e), and (f) of Section
10232.8 due to a loss of functional capacity to perform the activity.

(ii) Impairment of cognitive ability, meaning the insured needs
substantial supervision due to severe cognitive impairment, as
described in subdivisions (b), (d), and (e) of Section 10232.8.

(6) Has become involuntarily or voluntarily unemployed.

(c) The term “supplemental benefit” means a rider to or
provision in a life insurance policy, certificate, or annuity contract
that provides a benefit as set forth in subdivision (a) of Section
10271.

begin delete SEC. 2. end delete
begin insert SEC. 3. end insert   

Section 10295.6 of the Insurance Code is amended to
read:

10295.6.  

(a) When a policyholder or certificate holder requests
an acceleration of death benefits, the insurer shall send a statement
to the policyholder or certificate holder and irrevocable beneficiary
showing any effect that the payment of the accelerated death benefit
would have on the policy’s cash value, accumulation account,
death benefit, premium, policy loans, and policy liens. The
statement shall disclose that receipt of accelerated death benefit
payments may adversely affect the recipient’s eligibility for
Medicaid or other government benefits or entitlements. In addition,
receipt of an accelerated death benefit payment may be taxable
and assistance should be sought from a personal tax adviser. When
a previous disclosure statement becomes invalid as a result of an
acceleration of the death benefit, the insurer shall send a revised
disclosure statement to the policyholder or certificate holder and
irrevocable beneficiary.

(b) The accelerated death benefit shall be effective not more
than 30 days following the effective date of the policy provision,
rider, endorsement, or certificate.

(c)  If the insurer charges a separate premium for the accelerated
death benefit, then the insurer may also offer a waiver of premium
benefit as defined in subdivision (a) of Section 10271.1. At the
time the waiver of the accelerated death benefit premium benefit
is claimed, the insurer shall explain any continuing premium
requirement to keep the underlying policy in force.

(d) An insurer shall not unfairly discriminate among insureds
with different qualifying events covered under the policy or among
insureds with similar qualifying events covered under the policy.
An insurer shall not apply further conditions on the payment of
the accelerated death benefits other than those conditions specified
in the accelerated death benefit.

(e)  begin delete The end delete begin insert No less than one month after payment of an accelerated
death benefit, the end insert insurer shall provide the policyholder or
certificate holder with a report of any accelerated death benefits
paid out during the prior month, an explanation of any changes to
the policy or certificate, death benefits, and cash values on account
of the benefits being paid out, and the amount of the remaining
benefits that can be accelerated at the end of the prior month. The
insurer may use a calendar month or policy or certificate month.

(f) The conversion benefit available to group certificate holders
on termination of employment pursuant to paragraph (2) of
subdivision (a) of Section 10209 shall include a benefit comparable
to the accelerated death benefit. This requirement may be satisfied
by an individual policy or certificate. This requirement, subject to
the approval of the commissioner, may be satisfied by arrangement
with another insurer to provide the required coverage.

(g) When payment of an accelerated death benefit results in a
pro rata reduction in cash value, the payment may be applied
toward repaying a portion of the loan equal to a pro rata portion
of any outstanding policy loans if disclosure of the effect of
acceleration upon any remaining death benefit, cash value or
accumulation account, policy loan, and premium payments,
including a statement of the possibility of termination of any
remaining death benefit, is provided to the policyholder or
certificate holder. The policyholder or certificate holder shall
provide written consent authorizing any other arrangement for the
repayment of outstanding policy loans.

begin insert

begin insert SEC. 4. end insert   

end insert

begin insert Section 10295.15 of the end insert begin insert Insurance Code end insert begin insert is amended
to read: end insert

10295.15.  

(a) Except at the request of the policyholder or
contractholder, all accelerated death benefit provisions or
supplemental contracts shall be renewable for the life of the
underlying life insurance policy, provided the premiums are timely
paid. The statement shall be prominently displayed on the first
page of the accelerated death benefit policy or rider.

(b)  begin delete Term life insurance policies shall also end delete begin insert If an accelerated
death benefit is offered with an underlying term life insurance
policy, the accelerated death benefit shall end insert include a prominent
statement on page one that the accelerated death benefit terminates
with the policy.