The California Legislature has passed and the Governor has signed A.B. 1747, which will become effective on January 1, 2013. The new law (1) establishes a new minimum grace period during which individual and group life insurance policies must remain in force after a premium payment is missed; (2) gives certain policyowners the right to designate additional persons to receive notices of lapse; and (3) provides that notices of lapse and termination that are not mailed to the designees and known assignees are ineffective.

The law adds a new Section 10113.71 to the Insurance Code to require every life insurance policy issued or delivered in the state after the law's effective date to provide for a grace period of at least 60 days from the premium due date, with the policy remaining in force during the grace period. The grace period may not run concurrently with the period of paid coverage.

The new Section 10113.71 further provides that a notice of pending lapse and termination of a life insurance policy will not be effective unless mailed by the insurer to all of the following persons at least 30 days before the effective date of termination (if termination is for nonpayment of premium): (1) the named policyowner, (2) a designee named by the policyowner under a new Section 10113.72 for an individual life insurance policy (see below), and (3) a known assignee or other person having an interest in the individual life insurance policy. Notice must be given to the policyowner and the designee by first-class United States mail within 30 days after a premium is due and unpaid. Notices may be given to an assignee electronically if the assignee consents. This provision does not apply to nonrenewal.

A new Section 10113.72 is also added to provide that an individual life insurance policy may not be issued or delivered in California until the applicant is given the right to designate at least one person, in addition to the applicant, to receive notice of lapse or termination of the policy for nonpayment of premium. The insurer must provide each applicant with a form on which to submit the name, address, and telephone number of at least one other person who is to receive the notice. The insurer must also notify the policyowner annually of the right to change the designation—although the policyowner can choose to make changes more often.

In addition, for life insurance policies assigned after the law's effective date, Section 10173.2 is amended to require that each time the policyowner has failed or refused to transmit a premium payment to the insurer before the grace period begins or notice is mailed, the insurer must give written notice to an assignee (in any case where it has received written notice of the assignee's name and address) by prepaid postage addressed to the address on file not less than 30 days before the final lapse of the policy—that is, the date after which the policy will not be reinstated without a requirement of evidence of insurability or a written application. Notice must be given to an assignee as long as the assignment remains effective, unless the assignee waives the notice in writing and notifies the insurer of the waiver. The insurer may charge the policyowner, directly or by a charge against the policy, for the reasonable cost of complying with the notice requirement—but not more than $2.50 for each notice.

At this point there is no definitive information regarding the new policy form requirements. Nonetheless, it is not too early for insurers to begin reviewing their procedures and implementing compliance with the new law.