SB 426: Annuities: cash surrender benefits.
- Session Year: 2015-2016
- House: Senate
- Latest Version Date: 2015-07-15
Existing law governs annuities and, for those insurance contracts that provide cash surrender benefits, prescribes the cash surrender benefit available prior to maturity. Existing law also requires the death benefit under these contracts to be at least equal to the cash surrender benefit.
This bill would instead require the death benefit payable under contracts issued or delivered on or after January 1, 2016, to persons 65 years of age or older to be at least equal to the annuity value or accumulation value, excluding any surrender charges or penalties upon death. The bill would also make technical changes.
Existing law governs annuities and, for those insurance contracts that provide cash surrender benefits, prescribes the cash surrender benefit available prior to maturity. Existing law also requires the death benefit under these contracts to be at least equal to the cash surrender benefit.
This bill would instead require the death benefit payable under contracts issued or delivered on or after January 1, 2016, to persons 65 years of age or older to be at least equal to the annuity value or accumulation value, excluding any surrender charges or penalties upon death. The bill would also make technical changes.
Existing law governs annuities and, for those insurance contracts that provide cash surrender benefits, prescribes the cash surrender benefit available prior to maturity. Existing law also requires the death benefit under these contracts to be at least equal to the cash surrender benefit.
This bill would instead require the death benefit payable under contracts issued or delivered on or after January 1, 2016, to persons 65 years of age or older to be at least equal to the annuity value or accumulation value, excluding any surrender charges or penalties upon death. The bill would also make technical changes.
Existing law governs annuities and, for those insurance contracts that provide cash surrender benefits, prescribes the cash surrender benefit available prior to maturity. Existing law also requires the death benefit under these contracts to be at least equal to the cash surrender benefit.
This bill would instead require the death benefit payable under contracts issued or delivered on or after January 1, 2016, to persons 65 years of age or older to be at least equal to the annuity value or accumulation value without value, excluding any surrender charges or penalties upon death. The bill would also make technical changes.
Existing law governs annuities and, for those insurance contracts that provide cash surrender benefits, prescribes the cash surrender benefit available prior to maturity. Existing law also requires the death benefit under these contracts to be at least equal to the cash surrender benefit.
This bill would instead require the death benefit payable under contracts issued to persons 65 years of age or older to be at least equal to the annuity value or accumulation value without any surrender charges or penalties upon death.
Contracts that provide cash surrender benefits shall comply with all of the following:
(a)Cash surrender benefits available prior to maturity shall not be less than the present value as of the date of surrender of that portion of the maturity value of the paid-up annuity benefit which would be provided under the contract at maturity arising from considerations paid prior to the time of cash surrender reduced by the amount appropriate to reflect any prior withdrawals from or partial surrenders of the contract, decreased by the amount of any indebtedness to the company on the contract, including interest due and accrued on the indebtedness, and increased by any existing additional amounts credited by the company to the contract.
(b)For purposes of subdivision (a), the present value shall be calculated on the basis of an interest rate that is not more than 1 percent higher than the interest rate specified in the contract for accumulating the net considerations to determine the maturity value.
(c)The cash surrender benefit shall not be less than the minimum nonforfeiture amount at the time of the surrender.
(d)(1)Except as otherwise provided in paragraph (2), the death benefit shall be at least equal to the cash surrender benefit.
(2)For contracts issued or delivered on or after January 1, 2016, to persons who are 65 years of age or older, the death benefit shall be at least equal to the annuity value or accumulation value, excluding any surrender charges or penalties upon death.
Contracts that provide cash surrender benefits shall comply with all of the following:
(a)Cash surrender benefits available prior to maturity shall not be less than the present value as of the date of surrender of that portion of the maturity value of the paid-up annuity benefit which would be provided under the contract at maturity arising from considerations paid prior to the time of cash surrender reduced by the amount appropriate to reflect any prior withdrawals from or partial surrenders of the contract, decreased by the amount of any indebtedness to the company on the contract, including interest due and accrued on the indebtedness, and increased by any existing additional amounts credited by the company to the contract.
(b)For purposes of subdivision (a), the present value shall be calculated on the basis of an interest rate that is not more than 1 percent higher than the interest rate specified in the contract for accumulating the net considerations to determine the maturity value.
(c)The cash surrender benefit shall not be less than the minimum nonforfeiture amount at the time of the surrender.
(d)(1)Except as otherwise provided in paragraph (2), the death benefit shall be at least equal to the cash surrender benefit.
(2)For contracts issued or delivered on or after January 1, 2016, to persons who are 65 years of age or older, the death benefit shall be at least equal to the annuity value or accumulation value, excluding any surrender charges or penalties upon death.
Contracts that provide cash surrender benefits shall comply with all of the following:
(a)Cash surrender benefits available prior to maturity shall not be less than the present value as of the date of surrender of that portion of the maturity value of the paid-up annuity benefit which would be provided under the contract at maturity arising from considerations paid prior to the time of cash surrender reduced by the amount appropriate to reflect any prior withdrawals from or partial surrenders of the contract. contract, decreased by the amount of any indebtedness to the company on the contract, including interest due and accrued on the indebtedness, and increased by any existing additional amounts credited by the company to the contract.
(b)For purposes of subdivision (d), (a), the present value shall be calculated on the basis of an interest rate that is not more than 1 percent higher than the interest rate specified in the contract for accumulating the net considerations to determine the maturity value, decreased by the amount of any indebtedness to the company on the contract, including interest due and accrued, and increased by any existing additional amounts credited by the company to the contract. value.
(c)The cash surrender benefit shall not be less than the minimum nonforfeiture amount. amount at the time of the surrender.
(d)(1)Except as otherwise provided in paragraph (2), the death benefit shall be at least equal to the cash surrender benefit.
(2)For contracts issued or delivered on or after January 1, 2016, to persons who are 65 years of age or older, the death benefit shall be at least equal to the annuity value or accumulation value, excluding any surrender charges or penalties upon death.
For contracts which provide cash surrender benefits, such cash surrender benefits available prior to maturity shall not be less than the present value as of the date of surrender of that portion of the maturity value of the paid-up annuity benefit which would be provided under the contract at maturity arising from considerations paid prior to the time of cash surrender reduced by the amount appropriate to reflect any prior withdrawals from or partial surrenders of the contract, such present value being calculated on the basis of an interest rate not more than 1 percent higher than the interest rate specified in the contract for accumulating the net considerations to determine such maturity value, decreased by the amount of any indebtedness to the company on the contract, including interest due and accrued, and increased by any existing additional amounts credited by the company to the contract. In no event shall any cash surrender benefit be less than the minimum nonforfeiture amount at that time. The death benefit under such contracts shall be at least equal to the cash surrender benefit.
SEC. 2.Section 10168.4 is added to the Insurance Code, to read:10168.4.Contracts that provide cash surrender benefits shall comply with all of the following:
(a)Cash surrender benefits available prior to maturity shall not be less than the present value as of the date of surrender of that portion of the maturity value of the paid-up annuity benefit which would be provided under the contract at maturity arising from considerations paid prior to the time of cash surrender reduced by the amount appropriate to reflect any prior withdrawals from or partial surrenders of the contract.
(b)For purposes of subdivision (d), the present value shall be calculated on the basis of an interest rate that is not more than 1 percent higher than the interest rate specified in the contract for accumulating the net considerations to determine the maturity value, decreased by the amount of any indebtedness to the company on the contract, including interest due and accrued, and increased by any existing additional amounts credited by the company to the contract.
(c)The cash surrender benefit shall not be less than the minimum nonforfeiture amount.
(d)(1)Except as otherwise provided in paragraph (2), the death benefit shall be at least equal to the cash surrender benefit.
(2)For contracts issued or delivered on or after January 1, 2016, to persons who are 65 years of age or older, the death benefit shall be at least equal to the annuity value or accumulation value, excluding any surrender charges or penalties upon death.
SECTION 1.Section 10168.4 of the Insurance Code is amended to read:10168.4.For contracts which provide cash surrender benefits, the cash surrender benefits available prior to maturity shall not be less than the present value as of the date of surrender of that portion of the maturity value of the paid-up annuity benefit which would be provided under the contract at maturity arising from considerations paid prior to the time of cash surrender reduced by the amount appropriate to reflect any prior withdrawals from or partial surrenders of the contract, the present value being calculated on the basis of an interest rate not more than 1 percent higher than the interest rate specified in the contract for accumulating the net considerations to determine the maturity value, decreased by the amount of any indebtedness to the company on the contract, including interest due and accrued, and increased by any existing additional amounts credited by the company to the contract. The cash surrender benefit shall not be less than the minimum nonforfeiture amount at that time. The death benefit under these contracts shall be at least equal to the cash surrender benefit, except that the death benefit payable under contracts issued to persons 65 years of age or older shall be at least equal to the annuity value or accumulation value without any surrender charges or penalties upon death.
For contracts which provide cash surrender benefits, such the cash surrender benefits available prior to maturity shall not be less than the present value as of the date of surrender of that portion of the maturity value of the paid-up annuity benefit which would be provided under the contract at maturity arising from considerations paid prior to the time of cash surrender reduced by the amount appropriate to reflect any prior withdrawals from or partial surrenders of the contract, such the present value being calculated on the basis of an interest rate not more than 1 percent higher than the interest rate specified in the contract for accumulating the net considerations to determine such the maturity value, decreased by the amount of any indebtedness to the company on the contract, including interest due and accrued, and increased by any existing additional amounts credited by the company to the contract. In no event shall any The cash surrender benefit shall not be less than the minimum nonforfeiture amount at that time. The death benefit under such these contracts shall be at least equal to the cash surrender benefit. benefit, except that the death benefit payable under contracts issued to persons 65 years of age or older shall be at least equal to the annuity value or accumulation value without any surrender charges or penalties upon death.
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Date
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Status
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|---|---|
| Jun 16, 2015 | From committee with author's amendments. Read second time and amended. Re-referred to Com. on INS. |
| Jul 15, 2015 | Chaptered by Secretary of State. Chapter 100, Statutes of 2015. |
| Jul 15, 2015 | Approved by the Governor. |
| Jul 8, 2015 | Enrolled and presented to the Governor at 4:30 p.m. |
| Jul 6, 2015 | Assembly amendments concurred in. (Ayes 37. Noes 0.) Ordered to engrossing and enrolling. |
| Jul 6, 2015 | Assembly amendments concurred in. (Ayes 37. Noes 0. Page 1782.) Ordered to engrossing and enrolling. |
| Jul 2, 2015 | Read third time. Passed. (Ayes 78. Noes 0. Page 2232.) Ordered to the Senate. |
| Jul 2, 2015 | Read third time. Passed. Ordered to the Senate. |
| Jul 2, 2015 | In Senate. Concurrence in Assembly amendments pending. |
| Jun 25, 2015 | Read second time. Ordered to consent calendar. |
| Jun 24, 2015 | From committee: Do pass. Ordered to consent calendar. (Ayes 13. Noes 0.) (June 24). |
| Feb 25, 2015 | Introduced. Read first time. To Com. on RLS. for assignment. To print. |
| May 14, 2015 | Referred to Com. on INS. |
| Apr 27, 2015 | Read third time. Passed. (Ayes 36. Noes 0.) Ordered to the Assembly. |
| Apr 27, 2015 | Read third time. Passed. (Ayes 36. Noes 0. Page 772.) Ordered to the Assembly. |
| Apr 27, 2015 | In Assembly. Read first time. Held at Desk. |
| Apr 14, 2015 | Read second time and amended. Ordered to third reading. |
| Apr 13, 2015 | From committee: Do pass as amended. (Ayes 7. Noes 0. Page 524.) (April 8). |
| Mar 20, 2015 | Set for hearing April 8. |
| Mar 5, 2015 | Referred to Com. on INS. |
| Feb 26, 2015 | From printer. May be acted upon on or after March 28. |
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Date
|
Description
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Location
|
Votes
|
|
|---|---|---|---|---|
| Jul 6, 2015 | Unfinished Business SB426 Leyva Concurrence | Senate Floor |
Passed |
|
| Jul 2, 2015 | SB 426 Leyva Consent Calendar Second Day Regular Session | Assembly Floor |
Passed |
|
| Jun 24, 2015 | Do pass. To Consent Calendar. | Assembly Standing Committee on Insurance |
Passed |
|
| Apr 27, 2015 | Senate 3rd Reading SB426 Leyva | Senate Floor |
Passed |
|
| Apr 8, 2015 | Do pass as amended | Senate Standing Committee on Insurance |
Passed |
This list shows positions taken on this bill by organizations on the date displayed, which is linked to the original source.
Positions by individuals are not included.
|
Organization
|
Position
|
Date
|
|---|---|---|
| California Advocates for Nursing Home Reform | ** Support | Jul 6, 2015 |
| California Department of Insurance | ** Support | Jul 6, 2015 |
| California Health Advocates | ** Support | Jul 6, 2015 |
| Congress of California Seniors | ** Support | Jul 6, 2015 |
| Department of Insurance | ** Support | Jul 6, 2015 |
| Elder Financial Protection Network | ** Support | Jul 6, 2015 |
SB 426
Page 4
|
Office of Senate Floor Analyses (916) 651-1520 Fax: (916) 327-4478 |
UNFINISHED BUSINESS
Bill No: SB 426
Amended: 6/16/15
SENATE INSURANCE COMMITTEE: 7-0, 4/8/15
AYES: Roth, Gaines, Berryhill, Hall, Liu, Mitchell, Wieckowski
NO VOTE RECORDED: Hernandez
SENATE FLOOR: 36-0, 4/27/15
AYES: Allen, Anderson, Bates, Beall, Berryhill, Block, Cannella, De León, Fuller, Gaines, Galgiani, Hall, Hancock, Hernandez, Hertzberg, Hill, Hueso, Huff, Jackson, Lara, Leno, Leyva, Liu, McGuire, Mendoza, Mitchell, Monning, Morrell, Nguyen, Nielsen, Pan, Roth, Runner, Stone, Wieckowski, Wolk
NO VOTE RECORDED: Moorlach, Pavley, Vidak
ASSEMBLY FLOOR: 78-0, 7/2/15 (Consent) - See last page for vote
SUBJECT: Annuities: cash surrender benefits
SOURCE: California Department of Insurance
DIGEST: This bill requires the death benefit payable under annuities contracts issued to persons 65 years of age or older to be at least equal to the annuity value or accumulation value, excluding any surrender charges or penalties upon death.
Assembly Amendments make technical and clarifying changes.
Existing law:
Provides for the regulation of annuities contracts, including minimum non-forfeiture amounts prior to maturity.
Requires all disability and life insurance policies or certificates offered for sale to individuals 65 and older to include a 30-day “free look” period starting on receipt of the policy or certificate.
Provides that for annuities contracts that provide cash surrender benefits prior to maturity, any death benefit payable shall be at least equal to the cash surrender benefit.
Imposes, generally speaking, a special duty of honesty, good faith, and fair dealing on an insurer, broker, agent, and all others engaged in the transaction of insurance with a prospective insured who is 65 years of age or older.
Requires individual life insurance policies and annuity contracts issued to senior citizens to disclose information on, or the location within the policy of, any charges for surrender, partial surrender, excess withdrawal or penalties on the front of the policy jacket or on the cover page.
This bill:
Requires the death benefit payable under annuities contracts issued to persons 65 years of age or older to be at least equal to the annuity value or accumulation value, excluding without any surrender charges or penalties upon death.
Applies only to contracts issued or delivered on or after January 1, 2016.
Background
An annuity is a contractual financial product that is designed to accept and grow funds from an individual and then, upon annuitization, pay out a stream of payments to the individual at a later point in time. Annuities were designed to be a reliable means of securing a steady cash flow for an individual during their retirement years and to alleviate fears of outliving one's assets. Annuities can be created so that, upon annuitization, payments will continue so long as either the annuitant or their spouse (if survivorship benefit is elected) is alive. Alternatively, annuities can be structured to pay out funds for a fixed amount of time, such as 20 years, regardless of how long the annuitant lives. Furthermore, annuities can begin immediately upon deposit of a lump sum, or they can be structured as deferred benefits.
Deposits into annuity contracts are typically locked up for a period of time, known as the surrender period, where the annuitant would incur a penalty if all or part of that money were touched. These surrender periods can last anywhere from two to more than 10 years, depending on the particular product. Surrender charges can start out at 10% or more and the penalty typically declines annually over the surrender period. This is a particular concern for annuities sold to seniors who may experience unexpected medical or other costs or illness and cannot access their assets when needed.
This bill is limited to fixed rate and equity linked deferred annuities sold to individuals who are 65 years of age or older. With a deferred annuity, an annuitant pays up-front or over time for an income stream they will receive beginning at a specified date in the future. The annuitant generally does not receive a benefit until the specified date unless he or she passes away before that date and the beneficiary receives a death benefit as provided in the contract.
According to the Association of California Life and Health Insurance Companies and the American Council of Life Insurers, the overwhelming majority of contracts do not impose a surrender charge upon the death of the annuitant, although certain contracts might have a charge that is offset by another benefit included in the contract.
Prior Legislation
AB 2347 (Gonzalez, Chapter 166, Statutes of 2014) added immediate annuities to the insurance products that must include specified right of return and disclosure requirements when sold to individuals age 65 and older.
FISCAL EFFECT: Appropriation: No Fiscal Com.: No Local: No
California Department of Insurance (source)
California Advocates for Nursing Home Reform
California Health Advocates
Congress of California Seniors
Elder Financial Protection Network
None received
ARGUMENTS IN SUPPORT: According to the California Department of Insurance, this bill creates a best practice for insurers by providing additional protections for seniors who purchase fixed, deferred annuities. It prohibits companies from charging a surrender penalty on the death benefit and requires the benefit payment to be at least equal to the annuity value upon death.
California Advocates for Nursing Home Reform supports SB 426 because it offers additional protections to seniors and their families by placing safeguards on an insurance product that is intended to provide them financial security.
According to the Elder Financial Protection Network, for seniors who are generally buying annuities to protect themselves from out-living their money, surrender penalties on death can result in very low annualized interest or even a partial loss of premiums. While most companies do not currently pay out a death benefit that is less than the premiums paid, some insurers charge surrender penalties that reduce the death benefit below the amount of paid premiums.
ASSEMBLY FLOOR: 78-0, 7/2/15
AYES: Achadjian, Alejo, Travis Allen, Baker, Bigelow, Bloom, Bonilla, Bonta, Brough, Burke, Calderon, Campos, Chang, Chau, Chávez, Chiu, Chu, Cooley, Cooper, Dababneh, Dahle, Daly, Dodd, Eggman, Frazier, Beth Gaines, Gallagher, Cristina Garcia, Eduardo Garcia, Gatto, Gipson, Gomez, Gonzalez, Gordon, Gray, Grove, Hadley, Harper, Roger Hernández, Holden, Irwin, Jones, Kim, Lackey, Levine, Linder, Lopez, Low, Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Mullin, Nazarian, Obernolte, O'Donnell, Olsen, Patterson, Perea, Quirk, Rendon, Ridley-Thomas, Rodriguez, Salas, Santiago, Steinorth, Mark Stone, Thurmond, Ting, Wagner, Waldron, Weber, Wilk, Williams, Wood, Atkins
NO VOTE RECORDED: Brown, Jones-Sawyer
Prepared by: Erin Ryan / INS. / (916) 651-4110
7/2/15 11:39:51
**** END ****
SB 426
Page 2
Date of Hearing: June 24, 2015
ASSEMBLY COMMITTEE ON INSURANCE
Tom Daly, Chair
SB 426
(Leyva) – As Amended June 16, 2015
SENATE VOTE: 36-0
SUBJECT: Annuities: cash surrender benefits.
SUMMARY: Requires the death benefit payable under annuities contracts issued to persons 65 years of age or older to be at least equal to the annuity value or accumulations value without any surrender charges or penalties upon death.
EXISTING LAW:
Provides for the regulation of annuity contracts, including minimum nonforfeiture amounts prior to maturity.
Requires all disability and life insurance policies or certificates offered for sale to individuals 65 and older to include a 30 day “free look” period starting on receipt of the policy or certificate.
Provides that for annuities contracts that provide cash surrender benefits prior to maturity, any death benefit payable shall be at least equal to the cash surrender benefit.
Imposes a special duty of honesty, good faith, and fair dealing on an insurer, broker, agent, and all others engaged in the transaction of insurance with a prospective insured who is 65 years of age or older.
Requires individual life insurance policies and annuity contracts issued to senior citizens to disclose information on, or the location within the policy of, any charges for surrender, partial surrender, excess withdrawal or penalties on the front of the policy jacket or on the cover page.
FISCAL EFFECT: Undetermined
COMMENTS:
Purpose of the bill. According to the sponsor, this bill would create a best practice for insurers by providing additional protections for seniors who purchase fixed, deferred annuities. It would prohibit companies from charging a surrender penalty on the death benefit and require the death benefit payment to be at least equal to the annuity value upon death.
Background. Annuities are financial products designed to convert premium paid by the purchaser (in either a lump sum or periodic payments) into a stream of payments to the purchaser. Annuities are designed to provide a stable cash flow for the purchaser (most commonly for retirees) and alleviate the risk of outliving one's assets. Annuities can be structured so that annuity payments will continue so long as either the purchaser or their spouse (if survivorship benefit is elected) is alive or to pay out funds for a fixed period of time. Annuities can be structured to provide immediate payments or to defer payments to a later date.
REGISTERED SUPPORT / OPPOSITION:
Support
Department of Insurance (sponsor)
Elder Financial Protection Network (EFPN)
Opposition
None received
Analysis Prepared by: Paul Riches / INS. / (916) 319-2086
SB 426
Page 4
|
Office of Senate Floor Analyses (916) 651-1520 Fax: (916) 327-4478 |
THIRD READING
Bill No: SB 426
Amended: 4/14/15
SENATE INSURANCE COMMITTEE: 7-0, 4/8/15
AYES: Roth, Gaines, Berryhill, Hall, Liu, Mitchell, Wieckowski
NO VOTE RECORDED: Hernandez
SUBJECT: Annuities: cash surrender benefits
DIGEST: This bill requires the death benefit payable under annuities contracts issued to persons 65 years of age or older to be at least equal to the annuity value or accumulation value, excluding any surrender charges or penalties upon death.
Existing law:
Provides for the regulation of annuities contracts, including minimum non-forfeiture amounts prior to maturity.
Requires all disability and life insurance policies or certificates offered for sale to individuals 65 years of age and older to include a 30-day “free look” period starting on receipt of the policy or certificate.
Provides that for annuities contracts that provide cash surrender benefits prior to maturity, any death benefit payable shall be at least equal to the cash surrender benefit.
Imposes, generally speaking, a special duty of honesty, good faith, and fair dealing on an insurer, broker, agent, and all others engaged in the transaction of insurance with a prospective insured who is 65 years of age or older.
Requires individual life insurance policies and annuity contracts issued to senior citizens to disclose information on, or the location within the policy of, any charges for surrender, partial surrender, excess withdrawal, or penalties on the front of the policy jacket or on the cover page.
This bill:
Requires the death benefit payable under annuities contracts issued to persons 65 years of age or older to be at least equal to the annuity value or accumulation value, excluding any surrender charges or penalties upon death.
Applies only to contracts issued or delivered on or after January 1, 2016.
Background
An annuity is a contractual financial product that is designed to accept and grow funds from an individual and then, upon annuitization, pay out a stream of payments to the individual at a later point in time. Annuities were designed to be a reliable means of securing a steady cash flow for an individual during their retirement years and to alleviate fears of outliving one's assets. Annuities can be created so that, upon annuitization, payments will continue so long as either the annuitant or their spouse (if survivorship benefit is elected) is alive. Alternatively, annuities can be structured to pay out funds for a fixed amount of time, such as 20 years, regardless of how long the annuitant lives. Furthermore, annuities can begin immediately upon deposit of a lump sum, or they can be structured as deferred benefits.
Deposits into annuity contracts are typically locked up for a period of time, known as the surrender period, where the annuitant would incur a penalty if all or part of that money were touched. These surrender periods can last anywhere from 2 to more than 10 years, depending on the particular product. Surrender charges can start out at 10% or more and the penalty typically declines annually over the surrender period. This is a particular concern for annuities sold to seniors who may experience unexpected medical or other costs or illness and cannot access their assets when needed.
This bill is limited to fixed rate and equity linked deferred annuities that are sold to individuals who are 65 years of age or older. With a deferred annuity, an annuitant pays up-front or over time for an income stream they will receive beginning at a specified date in the future. The annuitant generally does not receive a benefit until the specified date unless he or she passes away before that date and the beneficiary receives a death benefit as provided in the contract.
An example of the problem this bill seeks to address: a consumer purchases an 8-year deferred fixed annuity for an upfront premium of $10,000. The contract credits 3% interest per year to the account and has an 8-year surrender period beginning at 8% and declining 1% annually. If the annuitant dies in the first year of the contract, the annuitant’s beneficiaries would receive $9,200. If the annuitant dies in the second year of the contract, the death benefit would be $9,579.
If the annuitant had received benefits or payments during the surrender period, any such payments would be deducted from the annuity value for purposes of the death benefit.
The Association of California Life and Health Insurance Companies and the American Council of Life Insurers say the overwhelming majority of contracts do not impose a surrender charge upon the death of the annuitant, although certain contracts might have a charge that is offset by another benefit included in the contract.
Prior Legislation
AB 2347 (Gonzalez, Chapter 166, Statutes of 2014) added immediate annuities to the insurance products that must include specified right of return and disclosure requirements when sold to individuals age 65 years and older.
FISCAL EFFECT: Appropriation: No Fiscal Com.: No Local: No
California Department of Insurance
California Advocates for Nursing Home Reform
California Health Advocates
Congress of California Seniors
Elder Financial Protection Network
None received
ARGUMENTS IN SUPPORT: According to the California Department of Insurance, this bill creates a best practice for insurers by providing additional protections for seniors who purchase fixed, deferred annuities. It prohibits companies from charging a surrender penalty on the death benefit and requires the benefit payment to be at least equal to the annuity value upon death.
California Advocates for Nursing Home Reform supports SB 426 because it offers additional protections to seniors and their families by placing safeguards on an insurance product that is intended to provide them financial security.
According to the Elder Financial Protection Network, for seniors who are generally buying annuities to protect themselves from out-living their money, surrender penalties on death can result in very low annualized interest or even a partial loss of premiums. While most companies do not currently pay out a death benefit that is less than the premiums paid, some insurers charge surrender penalties that reduce the death benefit below the amount of paid premiums.
Prepared by: Erin Ryan / INS. / (916) 651-4110
4/15/15 16:29:01
SB 426 (Leyva) Page 4 of 4
SENATE COMMITTEE ON INSURANCE
Senator Richard Roth, Chair
2015 - 2016 Regular
Bill No: SB 426 Hearing Date: April 8, 2015
Author: |
Leyva |
||
Version: |
February 25, 2015 |
||
Urgency: |
No |
Fiscal: |
No |
Consultant: |
Erin Ryan |
||
Subject: Annuities: cash surrender benefits
SUMMARY
Requires the death benefit payable under annuities contracts issued to persons 65 years of age or older to be at least equal to the annuity value or accumulations value without any surrender charges or penalties upon death.
DIGEST
Existing law
Provides for the regulation of annuities contracts, including minimum nonforfeiture amounts prior to maturity (§10168.2);
Requires all disability and life insurance policies or certificates offered for sale to individuals 65 and older to include a 30 day “free look” period starting on receipt of the policy or certificate;
Provides that for annuities contracts that provide cash surrender benefits prior to maturity, any death benefit payable shall be at least equal to the cash surrender benefit; (§10168.4)
Imposes, generally speaking, a special duty of honesty, good faith, and fair dealing on an insurer, broker, agent, and all others engaged in the transaction of insurance with a prospective insured who is 65 years of age or older; (§785)
Requires individual life insurance policies and annuity contracts issued to senior citizens to disclose information on, or the location within the policy of, any charges for surrender, partial surrender, excess withdrawal or penalties on the front of the policy jacket or on the cover page (§10127.13).
This bill
Would require the death benefit payable under annuities contracts issued to persons 65 years of age or older to be at least equal to the annuity value or accumulations value without any surrender charges or penalties upon death.
COMMENTS
Purpose of the bill To provide additional protections to seniors who purchase fixed rate and equity-linked annuities by prohibiting surrender charges or penalties on death.
Background An annuity is a contractual financial product that is designed to accept and grow funds from an individual and then, upon annuitization, pay out a stream of payments to the individual at a later point in time. Annuities were designed to be a reliable means of securing a steady cash flow for an individual during their retirement years and to alleviate fears of outliving one's assets. Annuities can be created so that, upon annuitization, payments will continue so long as either the annuitant or their spouse (if survivorship benefit is elected) is alive. Alternatively, annuities can be structured to pay out funds for a fixed amount of time, such as 20 years, regardless of how long the annuitant lives. Furthermore, annuities can begin immediately upon deposit of a lump sum, or they can be structured as deferred benefits
One criticism of annuities is that they are illiquid. Deposits into annuity contracts are typically locked up for a period of time, known as the surrender period, where the annuitant would incur a penalty if all or part of that money were touched. These surrender periods can last anywhere from 2 to more than 10 years, depending on the particular product. Surrender charges can start out at 10% or more and the penalty typically declines annually over the surrender period. This is a particular concern for annuities sold to seniors who may experience unexpected medical or other costs or illness and cannot access their assets when needed.
This bill is limited to fixed rate and equity linked deferred annuities that are sold to individuals who are 65 years of age or older. With a deferred annuity, an annuitant pays up-front or over time for an income stream they will receive beginning at a specified date in the future. The annuitant generally does not receive a benefit until the specified date unless he or she passes away before that date and the beneficiary receives a death benefit as provided in the contract.
An example of the problem this bill seeks to address: a consumer purchases an 8-year deferred fixed annuity for an upfront premium of $10,000. The contract credits 3% interest per year to the account and has an 8 year surrender period beginning at 8% and declining 1% annually. If the annuitant dies in the first year of the contract, the annuitant’s beneficiaries would receive $9,200. If the annuitant dies in the second year of the contract, the death benefit would be $9,579. The contract would not pay the amount of the initial premium for more than two years.
If the annuitant had received benefits or payments during the surrender period, any such payments would be deducted from the annuity value for purposes of the death benefit.
The Association of California Life and Health Insurance Companies
(ACLHIC) and the American Council of Life Insurers (ACLI) say the
overwhelming majoriy of contracts do not impose a surrender charge
upon the death of the annuitant, although certain contracts might
have a charge that is offset by another benefit included in the
contract. ACLHIC and ACLI have, however, expressed some concerns
with the bill as drafted. First, they ask that the bill be clarified
to only apply to annuity contracts issued after the bill’s
effective date. Secondly, they express concern over the application
of the bill to deferred income annuity products—products that
frequently are used as a tax-deferral tool. This product provides
guaranteed income at some point in the future (anywhere from 13 month
to 30 years after the last premium payment was made). If death occurs
prior to the date that income payments begin, the contract allows for
return of premium. The bill as proposed would require a death benefit
equal to the contract’s “annuity amount” or “accumulated
value,” but does not allow for just the return of premium. ACLHIC
doesn’t think the bill should apply to deferred income annuity
products.
Support According to the California Department of Insurance, this bill would would create a best practice for insurers by providing additional protections for seniors who purchase fixed, deferred annuities. It would prohibit companies from charging a surrender penalty on the death benefit and require the benefit payment to be at least equal to the annuity value upon death. California Advocates for Nursing Home Reform supports SB 426 because it offers additional protections to seniors and their families by placing safeguards on an insurance product that is intended to provide them financial security. According to the Elder Financial Protection Network, for seniors who are generally buying annuities to protect themselves from out-living their money, surrender penalties on death can result in very low annualized interest or even a partial loss of premiums. While most companies do not currently pay out a death benefit that is less than the premiums paid, some insurers charge surrender penalties that reduce the death benefit below the amount of paid premiums.
Opposition None received.
Questions In the case of deferred income annuity products, should seniors be limited to the return of premium upon death if the premium has been in the possession the insurance company for years generating interest income that would have been included in the future payment of benefits? ACLHIC and ACLI have asked for an amendment as follows: “the death benefit payable under contracts issued to persons 65 years of age or older shall be at least equal to the annuity value,
oraccumulation value, or return of premium without any surrender charges or penalties upon death.” This language would seem to allow the insurer to choose which option to apply. Is this fair to the consumer?
Suggested Amendments Amend the bill to clarify that the provisions of this bill only apply to annuity contracts issued on or after the effective date.
Prior and Related Legislation AB 2347 (Gonzalez, Ch. 166, Statutes of 2014) added immediate annuities to the insurance products that must include specified right of return and disclosure requirements when sold to individuals age 65 and older.
POSITIONS
Support
California Department of Insurance (sponsor)
California Advocates for Nursing Home reform
Elder Financial protection Network
California Health Advocates
Congress of California Seniors
Oppose
None received
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