BILL ANALYSIS Ó SENATE COMMITTEE ON INSURANCE Senator Richard Roth, Chair 2015 - 2016 Regular Bill No: AB 565 Hearing Date: June 22, 2016 ----------------------------------------------------------------- |Author: |Cooley | |-----------+-----------------------------------------------------| |Version: |March 10, 2016 Amended | ----------------------------------------------------------------- ----------------------------------------------------------------- |Urgency: |No |Fiscal: |No | ----------------------------------------------------------------- ----------------------------------------------------------------- |Consultant:|Hugh Slayden | | | | ----------------------------------------------------------------- Subject: Group life and disability insurance: required provisions SUMMARY Revises the standards for group life insurance related to waiver of premium benefits and dependent coverage. DIGEST Existing law 1. Establishes standards for life and disability insurance and subjects life and disability insurers to regulation by the California Department of Insurance (CDI). 2. Authorizes life insurers to issue a master group life insurance policy to employers, unions, credit unions and other qualified associations, so that individual members of the group may obtain coverage through that master policy. 3. Requires that every master policy include a provision that the insurer shall issue to the policyholder an individual certificate for distribution to the insured employee or group member that describes the insurance coverage. AB 565 (Cooley) Page 2 of ? 4. Permits an insurer to cover dependents of an insured employee, under specified conditions, so that the employee receives a death benefit on death of the dependent. 5. Defines dependents to include the insured's spouse, all children from birth until 26 years of age, or a child 26 years of age or older that suffers from a qualifying disability and is incapable of self-sustaining employment. 6. Authorizes insurers to include a benefit that waives premium charges on life insurance policies when the insured suffers a total disability. 7. Defines "total disability" as, during the first 24 months, the inability to perform the duties of the insured's current job due to sickness or bodily injury and, after the first 24 months, the inability to perform the duties of any suitable job due to sickness or bodily injury. 8. Requires an insurer, under waiver of premium benefit under a group policy, to waive all premiums due for the entire period of total disability if the insured develops a total disability before age 60. 9. Requires an insurer, under waiver of premium benefit under a group policy, to waive all premiums until the insured reaches age 65 if the insured develops a totally disability after attaining age 60. This bill 1. Permits an insurer to issue an individual certificate directly to the group member. 2. Revises the definition of "dependent" for the purpose of issuing dependent coverage, to include children up to the age of 26. AB 565 (Cooley) Page 3 of ? 3. Authorizes the insurer to permit the policyholder to elect coverage for dependent children based on factors such as marital status, student status, residency, or support requirements and, for dependent children over the age of majority, the group policyholder may elect coverage at age variations up to the limiting age. 4. Requires an insurer, under waiver of premium benefit under a group policy, to waive all premiums due for the period of total disability until the insured attains 65 years of age if the insured develops a total disability before age 60. 5. Authorizes an insurer, under waiver of premium benefit, to offer a policy that excludes disabilities developed once the insured reaches age 60 or older, but if the insurer offers that policy, it must also offer a policy that waives premiums until the age of 65. COMMENTS 1. Purpose of the bill According to the author, AB 565 clarifies that group life insurance policies are allowed, but not required, to provide coverage for the dependents of employees up to age 26. It also clarifies that a group life waiver of premium benefit is not required to be offered after age 60 and may end at separation from the group or at age 65 - a change that will align California group life provisions with national standards. 2. Background Group life insurance policies provide coverage to group members under a master policy. Each insured receives a certificate evidencing coverage. Group coverage is usually purchased through an employer, but may be purchased through other authorized associations. These policies are less expensive than individual counterparts and a medical exam is not usually required. Group policies provide a standard set of benefits chosen by the master policyholder. For example, an employer may AB 565 (Cooley) Page 4 of ? select the benefits and pay some or all of premium. Premiums for group policies are tied to the claims experience of the group; claims costs will result in increases in premium for the entire group. Coverage typically ends when the member leaves the group, such as when an employee changes jobs or retires. Employees have the right to convert the certificate to a permanent, individual policy when the employment relationship ends. However, the individual must choose from an individual policy offered by that insurer and pay the premium. According to the Association of California Life and Health Insurance Companies (ACLHIC), most group insurance is renewed on an annual term basis and offered to active employees. Individual policies are usually for longer terms or permanent (do not expire and the contract conditions remain fixed) and do not depend on employment or association. Dependent Coverage. Dependent life insurance covers a member's spouse or qualified child and pays the benefit to the member when a covered dependent dies. In 2011, SB 220 (Price), Chapter 126, Statutes of 2011, authorized insurers to cover children "from birth until 26 years of age." However, stakeholders disagree as to whether insurer must cover all children up to age 26, or whether an insurer may cover children up to a selected maximum age that is no greater than age 26. This bill would clarify that an insurer may offer a policyholder the option to choose a maximum age limit at or between 18 and 26. It also expressly provides that coverage may be limited based on factors related to dependency including marital status, student status, residency, or whether the group member is supporting the child. Waiver of Premium. Insurance coverage designed to replace lost income due to total disability often terminates at age 65. These policies are a form of disability (not life) insurance and subject to a different set of standards. Life insurers may waive premium during periods when the insured can no longer work so that coverage remains in force until the end of the disability or the insured reaches an age specified by the policy. This feature does not replace income or provide a cash benefit. AB 565 (Cooley) Page 5 of ? Prior to 2013, CDI applied disability insurance standards to life insurance policies that waive premium for disability. The application of dual standards presented a significant obstacle for insurers to introduce premium waivers into the California market. SB 1449 (Calderon, 2012), Chapter 567, Statutes of 2012, established specific standards for waivers of premium including minimum waiver periods based on whether the insured develops a disability before or after reaching the age of 60. SB 1449 was based on standards developed by the Interstate Insurance Product Regulation Commission (IIPRC) designed for individual life insurance policies that had no connection to retirement or termination of employment. (The IIPRC establishes a uniform set of standards and a single policy approval process for its 44 participating states; the approved product may be sold in all member states.) In 2013, after the enactment of SB 1449, the IIPRC adopted standards specific to group policies that permit the insurer to require that the disability begin before age 60 and that permit the insurer to terminate the waiver at set age not less than age 65. At the same time, industry stakeholders began raising concerns that standards established by SB 1449 made these policies unaffordable. In response, the Legislature enacted AB 2578 (Dababneh), Chapter 360, Statutes of 2014, permitting insurers to limit the waiver to the period of disability. AB 565 continues the approach taken by AB 2578 and more closely aligns California law to the IIPRC standards applicable to group policies. Similar to disability income insurance, this bill permits insurers to terminate the waiver of premium benefit at a proxy retirement age (65 years or older) when the insured develops a disability before age 60. It also permits the insurer to limit the waiver of premium benefit to disabilities developed before the age of 60, even if the insured remains a member of the group. 3. Support ACLHIC points out that unlike the federal Affordable Care Act that provides coverage that benefits dependent children, dependent life insurance coverage pays the benefit the parent/group member. An interpretation of AB 565 (Cooley) Page 6 of ? existing law that requires coverage for all children under age 26 unduly restricts options for employers and affinity groups. ACLHIC also argues that group life insurance is usually provided during an insured's span of employment with the group policyholder or with a known set of limitations as part of affinity group coverage. Treating group coverage like individual coverage could lead employers and groups to forego the waiver of premium benefit due to the added expense. As a result, employees would be deprived of the ability to have their premium paid while disabled, at a time they most need financial help. 4. Opposition CDI has raised concerns that subclassifications of dependent coverage might not be actuarially justified. CDI also questions the assertion that the existing standards are not cost-effective. Additionally, CDI expresses concerns that policyholders currently holding the more generous benefits required under existing law will be forced to take the less generous benefits authorized by this bill. 5. Suggested Amendments Amendments to Section 10270.6 that authorize the group insurer to deliver certificates directly to group members are the result of a drafting error. The author has agreed to take amendments that address concerns raised by CDI in its letter of opposition. The amendments would do the following: a. Remove language that explicitly authorizes the group policyholder to select groups of children based on specified factors, such as marital status, student status, residency, or support requirements. Stakeholders agree that such factors may be relevant to determining in whether children of the insured are actually dependent on the insured. However, SB 220 unintentionally required insurers to cover all children up to age 26 and severely restricted a master policyholder's ability to limit coverage to what they view as actual dependents. These amendments are intended to return the law, in that regard, AB 565 (Cooley) Page 7 of ? to what it was prior to SB 220, and continue the prior practice of evaluating the validity of factors on a case-by-case basis according to their actuarial relevancy to actual dependency, insurable interest, and impact on mortality. b. Require insurers to offer a master policyholder the option to renew the more generous waiver of premium period. This bill would allow insurers to offer less generous periods of waived premium when an insured develops a qualifying disability. CDI expressed concerns that existing master policyholders may be forced to give up these benefits under the new standards. These amendments are intended to give the master policyholder the option to continue the more generous benefits on subsequent renewals. Although, the insurer would not be required to offer the more generous benefit on renewal in later years if the policyholder chooses the less generous option, representatives of the insurance industry explain that an insurer would likely accommodate a request by the policyholder to add the more generous benefit (but at a higher premium). POSITIONS Support Association of California Life and Health Insurance Companies (sponsor) American Council of Life Insurers Oppose California Department of Insurance -- END --