Key Annuity Legislation

SB 482 (Johnston, Chapter 974) Key Annuity Legislation California insurance consumers are protected against insurance company insolvency or impairment by the California Life and Health Insurance Guarantee Association. The California Life and Health Insurance Guarantee Association was created in 1993 with passage of SB 482, which abolished two earlier guarantee associations (one for life insurance and one for health insurance) and created a single association. Its purpose is: "(T)o provide coverage for persons for direct, nongroup life, health, annuity, and supplemental policies or contracts of insurance, except as specified, in case of failure in the performance of contractual obligations under policies and contracts because of the impairment or insolvency of the member insurer that issued the policies or contracts." In creating the California Life and Health Insurance Guarantee Association, this law had the following impact on insured annuity regulation: The law specifies the duties and powers of the association, and the instances and procedures for payment of claims. The law requires life insurers to file an annual risk-based capital report concerning various risks to the insurer's assets. The law requires certain rehabilitative actions by insurers based on the report, and, in some instances, would authorize the commissioner to take action. SB 1065 (Mello, Chapter 516) Also enacted into law in 1993 was Senate Bill 1065, which took the first step towards protecting the special interests of senior citizens (generally defined as anyone age 65 and older). While SB 1065 did not include annuities, it set the stage for similar legislation to follow. This law expanded the free-look period following the delivery of a life insurance policy from 10 days (applicable in non-senior sales) to 30 days. The law also required, for the first time, that any offer of life insurance to a senior citizen that included illustrations of nonguaranteed values must also include clear disclosures to that effect. It requires that annual statements be mailed to senior citizen policyowners to disclose the current accumulation value and current cash surrender value. It also required that any life insurance policy sold to a senior citizen include a full and clear disclosure of the surrender period and penalties associated with cash value withdrawals. SB 1505 (Calderon, Chapter 984) Senate Bill 1505, passed in 1994, made changes in the cancellation procedures and notice requirements for life insurance and individual annuity contracts. It provided that senior citizens who purchase and then cancel a variable annuity contract, variable life insurance contract, or modified guaranteed contract are entitled to a refund of any policy fees paid as well as payment for the value of the account. These provisions do not apply to specified types of group life insurance or group annuity contracts. The law required that senior buyers be provided notice of the cancellation provisions. In lieu of providing a separate notice, life insurance and annuity contracts may type or affix a sticker on the cover or jacket of the contract noting where the provision is addressed in the contract. 1

This bill also provided that modified guaranteed annuities (that is, annuities that pay the higher of current or guaranteed interest rates) must, upon surrender, pay the full cash value (minus any contractual surrender charges) without market adjustment factors that might otherwise reduce the surrender value. AB 2984 (Committee on Insurance, Chapter 203) With passage of the Financial Services Modernization Act of 1999 (also known as the Gramm-Leach- Bliley), banks and other depository institutions were permitted for the first time to engage in the marketing and sale of life insurance. Many non-insurance financial institutions (including broker/dealer firms as well as some banks) were already marketing annuities, but passage of Gramm-Leach-Bliley removed any barriers that might have been preventing other banks from selling annuities. Passed in response to Gramm-Leach-Bliley, AB 2984 (effective in 2002) established provisions regulating retail sales practices, solicitations, advertising, and offers of any insurance product or annuity to a consumer by a bank, or by any person engaged in those activities at the bank or on behalf of a bank. AB 284, (Chavez, Chapter 381) In 2003, several important pieces of legislation directly impacting the marketing and sale of annuity contracts in California were passed, the first of which was AB 284. A little noticed law, AB 284 effectively removed an insurance company's right to defer the distribution of funds from a surrendered deferred annuity. Prior to this law, insurers had been permitted to defer distributions for up to six months following the request for surrender. This created hardship situations for consumers needing the money as soon as possible. Insurers may now defer the payment of the cash surrender benefit for up to six months only after making written request and receiving written approval of the commissioner of insurance. The law applies to contracts issued on and after January 1, 2006, but insurance companies may elect to apply them, on a contract-form-by-contract-form basis, to any contract issued on or after January 1, 2004, and before January 1, 2006. SB 618 (Scott, Chapter 546) Senate Bill 618, also passed in 2003, focused on the special needs of senior consumers. Although it largely addressed the purchase of life insurance by seniors (age 65 and older), it set the stage for related legislation that was soon to follow. SB 618 also increased the fine for certain marketing violations by agents and brokers, and specified that disciplinary hearings must be held promptly (within 90 days) for any allegations of misconduct directed against a person age 65 or over. SB 620 (Scott, Chapter 547) By far the most significant legislation geared to senior citizens and annuities is Senate Bill 620, also passed in 2003. Existing laws imposed a special duty of honesty, good faith, and fair dealing on an insurer, broker, or agent engaged in the transaction of insurance with a prospective buyer of insurance who is 65 years of age or older. SB 620 tightens restrictions on insurer advertising practices that target senior citizens and expands the scope of existing restrictions (previously applicable to disability insurance), to life insurance and annuities. The law goes so far as to prohibit the sale of annuities to seniors in certain circumstances. To prevent conflicts of interest, it prohibits insurance agents and brokers who are not attorneys from sharing commissions or other compensation with attorneys. Pre-Meeting Notice Senate Bill 620 requires that, before visiting a senior's home, agents and brokers first provide seniors with a written notice in 14-point type that the meeting will include a sales presentation on life insurance, annuities, or other products. This notice must be delivered to the senior at least 24 hours before the 2

scheduled appointment. Besides listing the names of all individuals who will accompany the agent or broker at the meeting, the notice must remind seniors of their right to: have other persons present at the meeting, including family members, financial advisers or attorneys. end the meeting at any time; and Contact the California Department of Insurance for information or to file a complaint. When the meeting is conducted in the senior's home, the agent or broker must begin by stating the purpose of the meeting, which is to discuss insurance. If applicable, the agent or broker must also explain that he will gather information for a follow-up visit to possibly sell insurance. Prohibited Annuity Sales SB 620 expressly prohibits the sale of annuities to seniors in certain circumstances. Specifically, in addition to any other reasons that a sale of an individual annuity to a senior may violate any provision of law, an annuity may not be sold to a senior in either of the following circumstances: 1. The senior's purpose in purchasing the annuity is to qualify for Medi-Cal eligibility and: a. the purchaser's assets are equal to or less than the community spouse resource allowance ($113,640 for 2012) b. the senior would otherwise qualify for Medi-Cal (that is, without purchasing the annuity): 2. The senior's purpose in purchasing the annuity is to qualify for Medi-Cal eligibility and, after buying the annuity, the senior (or the senior's spouse) find they do not qualify for Medi-Cal. If either of the prohibited transactions occurs, the senior is entitled to a full refund by the issuing insurer. In the case of a fixed annuity, the issuer must rescind the contract and refund all premiums, fees, interest earned, and any other costs paid for the annuity. With a variable annuity, the refund is equal to the full account value. 30-Day Free-Look Period Every annuity contract issued to a senior in California after July 1, 2004, must include a notice that essentially gives the senior at least 30 days to return the contract to the insurer or agent after receiving it for full refund of monies paid. The law specifies that this notice will be printed in 12-point bold capitalized type on the contract cover or face page. For purposes of this provision, a senior is anyone age 60 or older. To ensure that the full premium is available in the event of a cancellation, variable annuities must invest premiums in a fixed-interest account during the 30-day free-look period. After 30 days, the insurer can direct funds into the subaccounts selected by the senior. A senior who buys a variable annuity has the right to waive the 30-day fixed-interest requirement. A senior might do this if he felt quite confident that market values were increasing. If the senior waives the fixed-interest requirement and later cancels the contract within the 30-day free-look period, the refund will equal the current account value even if it less than the premium paid. Replacement Restrictions Senate Bill 620 prohibits agents and brokers from recommending either the replacement of, or the conservation of, an existing annuity contract by use of "materially inaccurate presentation or comparison of an existing contract's premiums and benefits or dividends and values." The law further prohibits agents and brokers from "recommend(ing) that an insured 65 years of age or older purchase an unnecessary replacement annuity." 3

The term unnecessary replacement is defined as: The sale of an annuity to replace an existing annuity that requires that the insured will pay a surrender charge for the annuity that is being replaced and that does not confer a substantial financial benefit over the life of the policy to the purchaser so that a reasonable person would believe that the purchase is unnecessary. No Commission Sharing with Lawyer To help ensure that legal counsel is unbiased in advising consumers in an insurance transaction, agents and brokers "may not share a commission or other compensation with an active member of the State Bar of California." This rule does not apply if the agent or broker is also an active member of the State Bar of California. Annuity Certification Training Senate Bill 620 mandates that all agents and brokers who sell annuities in California must "satisfactorily complete eight hours of training prior to soliciting individual consumers in order to sell annuities." This annuity education program is in addition to any other licensing exams the agent or broker must satisfactorily complete to become licensed to sell life insurance and annuities. This course has been written to meet the outline requirements of this provision of the law. This education provision further requires California agents and brokers who sell annuities to complete four hours of annuity training prior to each license renewal. For resident agents and brokers, this CE requirement is part of, not in addition to, the standard continuing education requirements of California. In other words, the annuity CE hours count towards the agent or broker's full continuing education requirement. This education requirement does not apply to nonresident agents of a direct response insurance company. In effect, this means nonresident telephone solicitors of insurance are exempt from this education requirement, as long as the insurance being marketed is only sold by telephone. SB 483 (Medi-Cal Eligibility Bill) California Senate Bill 483, which passed in September 2008, made major changes to California s Medicaid program, Medi-Cal. The bill was designed to ensure that California is in compliance with the federal Deficit Reduction Act of 2005. The provisions of Senate Bill 483 are not effective, however, until the Department of Health Care Services (DHCS) adopts regulations pursuant to the bill and files such regulations with the Secretary of State. To date, the DHCS has not yet adopted such regulations. Key provisions of the bill, which apply to applicants for home and facility care, increase the look-back period, which is the time within which Medi-Cal can review transfers of assets, from 30 to 60 months. It requires the state to begin periods of ineligibility in either the month of application, or the first day of the month during or after which assets were transferred by an eligible Medicaid beneficiary when the beneficiary begins receiving those services. require the state to develop a hardship waiver process; periods of ineligibility cannot be imposed when undue hardship exists. It permits nursing facilities to request consideration of undue hardship for their patients upon approval of the personal representative, if any. set $750,000 as the equity interest in a home that can be exempted for persons who seek eligibility for Medi-Cal long-term care services. Equity interest is the assessed value, or the appraised value of the home, whichever is lower, minus encumbrances. requires Medi-Cal applicants to disclose whether they or their spouse have an annuity and requires the state to determine whether an annuity is the type for which the state may become a remainder beneficiary. Exempt annuities include work-related annuities and other retirement 4

plans, in certain circumstances. The annuity provisions of Senate Bill 483 will be discussed later in greater detail. AB 689 (Blumenfield, Chapter 295) Assembly Bill 689, which was enacted in 2011, tightened standards for training and insurer supervision of producers selling annuities in California. Existing law requires agents and insurers to fulfill certain requirements with regard to the replacement of existing life insurance policies and annuities. AB 689 requires insurers and insurance producers, as defined, to comply with specified requirements regarding the purchase, exchange, or replacement of an annuity recommended to a consumer, including, but not limited to, having reasonable grounds for the insurance producer believing the annuity transaction would be suitable for the consumer, as provided. The bill prohibits insurance producers from selling annuities unless they have completed Insurance Commissioner-approved certification training and insurer-provided product training. The Commissioner is authorized to require certain actions by, and impose sanctions and penalties on, insurers and their agents for a violation of any of the bill s provisions. Annuity Product Training Under AB 689, effective January 1, 2012, an insurance producer must not solicit the sale of an annuity product unless the insurance producer has adequate knowledge of the product to recommend the annuity and the insurance producer is in compliance with the insurer's standards for product training. An insurance producer may rely on insurer-provided product-specific training standards and materials to comply with this training requirement. An insurer must establish standards for insurance producer product training and must maintain reasonable procedures to require its producers to comply with the producer annuity training requirements established in Section 10509.915 in the California Insurance Code. The insurer must provide productspecific training and training materials that explain all material features of its annuity products to its producers. [CIC Sec. 10509.915] 5