California Outlaws Annuity Surrender Penalties Charged To Death Benefit

California Gov. Jerry Brown signed legislation to prevent insurance carriers from levying surrender charges against the annuity’s death benefit, a move government officials say will protect senior citizens.

The law, backed by senior citizens groups and California insurance regulators, sailed through the California Legislature. It passed the state Senate by a 37-0 vote and the state Assembly by a 78-0 vote. The law takes effect Jan. 1, 2016.

“It is clear to me — and am certainly pleased that the governor agrees — that if a senior dies in the first few years after purchasing a fixed deferred annuity, their living spouse or beneficiary should receive at least the full amount of their initial investment,” said state Sen. Connie M. Leyva, who authored the bill, SB-426.

California lawmakers codified what is already considered a best practice in the industry and there was no official opposition to the bill from the insurance industry.

Surrender charges, a penalty levied against the annuitant for withdrawing a portion of the investment early on in the life of the annuity, is designed to protect carriers that invest in longer duration, liquid assets.

Annuitants purchase a death benefit in case they die before the annuity begins paying benefits.

Though many companies do not currently pay out a death benefit that is less than the premiums paid into the annuity, some insurers charge surrender penalties. Depending on the size of the surrender charge, the death benefit paid out can be less than the amount of premium paid in.

Current law allows insurance companies to apply penalties to death benefits in the same way that a voluntary surrender is charged a penalty.

The new law requires that the death benefit for fixed deferred annuities be at least equal to the annuity amount or the accumulation value for those annuities issued to consumers 65 years of age or older, the California Department of Insurance said in a news release.

Advocates for nursing home reform, health care and elder financial protection backed the bill, and states with strong regulatory regimes are starting to close loopholes to protect seniors, who can be vulnerable to unscrupulous agents.

In separate new release related to elder abuse, former insurance agent John Paul Slawinksi, owner of JPS Insurance Services, was sentenced July 15 to nine years in prison and ordered to pay $3.4 million in restitution.

Slawinski was arrested last July and charged with five felony counts of financial elder abuse and five counts of burglary for stealing more than $2 million.

State and county officials said Slawinski talked victims into handing over their annuities and other investments with the promise that the proceeds would be reinvested into higher yielding investments.

Instead, Slawinski took the money, never reinvested the funds nor refunded his victims, according to prosecutors. He covered his tracks by sending them financial statements purporting to show rising investment returns.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].