BILL ANALYSIS                                                                                                                                                                                                    Ó



          SENATE COMMITTEE ON INSURANCE
                             Senator Richard Roth, Chair
                                2015 - 2016  Regular 

          Bill No:              AB 565        Hearing Date:    June 22,  
          2016
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          |Author:    |Cooley                                               |
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          |Version:   |March 10, 2016    Amended                            |
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          |Urgency:   |No                     |Fiscal:    |No               |
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          |Consultant:|Hugh Slayden                                         |
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              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.









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           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.








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           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  








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              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.  








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              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  








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              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,  








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                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


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