The California legislature has passed, and the governor has signed, a new fixed annuity law that essentially codifies a surrender charge practice that most annuity carriers have followed as a matter of everyday practice—or a “current best practice,” as Insurance Commissioner Dave Jones has put it.
The measure, Senate Bill 426 (Leyva), requires that, when fixed deferred annuities are issued to consumers age 65 or older, the death benefit must at least equal the annuity amount or the accumulation value.
In addition, it prohibits fixed deferred annuity companies from charging a surrender penalty on the death benefit payment.
As annuity legislation goes, this measure had smooth sailing. Introduced on Feb. 25, its amended version passed in both houses with no opposition. On July 15, Gov. Jerry Brown signed bill. The effective date is Jan. 16, 2016.
The question is for annuity professionals is, why did the state enact the law since the spotlighted practice is already a common industry practice?
A senate analysis of the bill even acknowledged the common practice by alluding to information from the Association of California Life and Health Insurance Companies and the American Council of Life Insurers.
According to those groups, the analysis said, “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.”
Jones and other supporters of the measure likewise acknowledged the common practice. So why?
It’s about senior protection
The answer has to do with senior protection issues. The California Advocates for Nursing Home Reform, which supported the legislation, said the measure will offer additional protections to seniors and their families.
The law will do this by placing safeguards on an insurance product that is intended to provide seniors financial security, the group said.
Another supporter, the Elder Financial Protection Network, noted that most companies do not currently pay out a death benefit that is less than the premiums paid. However, it said, some insurers charge surrender penalties that reduce the death benefit below the amount of paid premiums.
Jones, who championed the legislation, cited those same points in a press release announcing the enactment. He did not cite examples or name names, so the magnitude of the problem is not in the public record. However, he said that this is the reason for the legislation.
"Consumer protection and helping seniors avoid possible financial hardship is paramount to the mission of the Department of Insurance," Jones also said.
Fraud prevention is a high priority in California, too. As InsuranceNewsNet readers may recall, California has a unique Life & Annuity Consumer Protection Program. This has a fund that pays for personnel, such as attorneys and investigators, and expenses for prosecution and informing the public about life insurance and annuity fraud. InsuranceNewsNet Editor-in-Chief Steve Morelli wrote about this last year.
With a new annuity law on the books, the investigators will have another area to monitor.
InsuranceNewsNet Editor-at-Large Linda Koco, MBA, specializes in life insurance, annuities and income planning. Linda can be reached at [email protected].
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