SACRAMENTO – New consumer protections were ushered in on Thursday when Gov. Jerry Brown signed Senate Bill 426 (Leyva) into law.

Sponsored by Insurance Commissioner Dave Jones, the new law protects seniors and their beneficiaries from financial losses incurred when insurers apply surrender penalties to annuities paid as a death benefit.

Seniors often buy annuities to protect themselves from outliving their money, although these contracts also contain death benefit provisions in case the annuitant dies before the annuity begins paying benefits.

Surrender penalties are often charged by insurance companies in the first few years of an annuity contract because insurers typically invest in longer duration, liquid assets.

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

Because of this, early death in an annuity contract can result in minimal interest earnings or even a death benefit that is lower than what was actually paid in premiums.

“Consumer protection and helping seniors avoid possible financial hardship is paramount to the mission of the Department of Insurance,” said Commissioner Dave Jones. “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. I thank Senator Leyva for partnering with me on this change in law.”

The new law codifies a current best practice for insurers by requiring 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.

This bill also prohibits companies from charging a surrender penalty on the death benefit payment.

Taking effect on Jan. 1, 2016, SB 426 earned strong bipartisan support in the Legislature and was supported by the California Advocates for Nursing Home Reform, California Health Advocates, Congress of California Seniors and the Elder Financial Protection Network.