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  • California Governor Signs Bill Prohibiting Surrender Penalties on Fixed Deferred Life Annuities

    July 21, 2015 by Thomas Harman

    California Gov. Jerry Brown has signed a bill prohibiting insurers from charging surrender penalties on life annuities paid as a death benefit.

    The new law also requires the death benefit for fixed deferred annuities be at least equal to either the annuity amount or the accumulation value for those annuities issued to consumers 65 years of age or older.

    The bill, which had bipartisan legislative support, will take effect Jan. 1, 2016.

    Surrender penalties are often charged by insurers during the first few years of an annuity contract because insurers invest in long-term, liquid assets and existing law allows insurers to apply those penalties to death benefits just as a voluntary surrender is penalized, the state Department of Insurance said in a statement. Because of this, early death in an annuity contract can result in minimal interest earnings or even a death benefit that was lower than what was actually paid in premiums, the DOI said.

    “Consumer protection and helping seniors avoid possible financial hardship is paramount to the mission of the Department of Insurance,” Insurance Commissioner Dave Jones said in a statement. “While many companies do not currently pay out a death benefit that is less than the premium paid, some insurers do apply surrender penalties reducing the death benefit below the total premiums, which is the reason for this important legislation.

    Surrender penalties have been identified as an issue by the International Monetary Fund, which recently said life insurers pose a financial risk and that a U.S. national regulator is needed. With life insurers taking on greater market risk in an attempt to boost yield, the chance of negative shareholder equity is increasing, the IMF said. However, a short-term interest rate increase could lead to increased numbers of policy surrenders as policyholders move into products with higher yields, a scenario that would leave the life insurance sector vulnerable to losses on products exempt from surrender penalties (Best’s News Service, July 7, 2015).

    Also, the DOI earlier this year reached a $1.3 million settlement with Midland National Life Insurance Co. for selling annuities deemed inappropriate. The probe said Midland agents earned annuities by selling unnecessary long-term replacement annuities to senior citizens. Those annuities were resulting in large surrender payments, presenting complications for consumers who need to liquidate the annuity before the surrender period expires (Best’s News Service, Feb. 5, 2015).

    Originally Posted at AM Best on July 20, 2015 by Thomas Harman.

    Categories: Industry Articles
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