Stranger originated annuity transactions take center stage

By Kim O'Brien

The Annuity Advocate

Connecticut Commissioner Tom Sullivan, Chair of the NAIC Life Insurance and Annuities (A) Committee, announced that they will hold an interim meeting and public hearing titled "Is the STOLI Market Moving to Annuities, and How Should We Protect Consumers?" The hearing is designed to allow the industry and interested parties to present their views on this issue to Committee members. The meeting will take place on Thursday, May 20, 2010, in Washington DC.

In an April 8th memo, Sullivan expressed interest in hearing specific testimony related to the following:
  1. Whether these transactions were lawful
  2. How these transactions affect insurable interest
  3. Whether current laws and regulations provide adequate consumer protections with regard to these transactions

    • If not, whether current laws and regulations need to be revised or new laws and regulations developed.
Like stranger originated life insurance transactions (STOLI), producers and/or investors offer a stranger a nominal fee for the use of their identity as the measuring life on an annuity. While fixed annuities have not typically been used to date, some instances of deferred bonus annuities have been used in recent cases. Typically, individuals targeted to serve as annuitants are in extremely poor health and are not expected to live beyond the first year of the policy. In order to find individuals who meet the above criteria, producers and/or investors have been known to take out advertisements in papers as well as solicit individuals residing in nursing homes or hospice care.

Once a stranger has agreed to the terms of the conditions posed, the producer/registered rep will complete the annuity application, ensuring particular features, such as a bonus rider or a guaranteed minimum death benefit, to facilitate a specific rate of return for those financing the annuity purchase. Depending on the number of companies represented and the commission policies in effect, producers/registered reps may purchase multiple policies from multiple companies.

To avoid added scrutiny of the policy or detection of the scheme, producer/registered reps will often take precautions to ensure the dollar amount of the annuity falls below specific underwriting guidelines or policy maximums. A trust or an organization will additionally be named as beneficiary of the annuity in order to hide the true identity of those who will benefit from the annuitant's death.

Financial implications of stranger originated annuity transactions can be detrimental to the industry and consumers. NAFA suggests that insurance companies and marketing organizations protect customers by:
  • Reviewing chargeback policies to ensure producer/registered rep commissions are adjusted if a policy is annuitized within the first year of the contract.
  • Creating detection methods to identify producer/registered reps who may be involved in the facilitation of stranger originated annuity transactions.
  • Ensuring annuity applications conform to suitability review guidelines and the suitability review process creates red flags that identify questionable applications and refers them for additional review.
  • Reporting potential stranger originated annuity transactions to the appropriate Department of Insurance.
NAFA's prepared comments for the meeting will emphasize that as insurance products, annuities protect consumers by offering guaranteed benefits, including death benefits and income for life. To the extent that investors are seeking terminally ill consumers to purchase annuities on these vulnerable consumers, the annuities are being used as a wagering contract on the death of the vulnerable consumer, and should be void as a matter of public policy.

While investors may try to avoid detection by purchasing an annuity through a trust or other mechanism, in most circumstances, a sale of an annuity to a non-natural person as owner is a transaction that benefits the consumer and is legal. The current NAIC Suitability in Annuity Transactions Model Regulation adopted in 40 states and the NAIC Disclosure Model Regulation, as well as the revisions to the Suitability Model adopted this March collectively provide a framework for carriers to obtain the information to identify sales that are unsuitable and do not benefit the consumer. With the heightened awareness of the use of annuities by investors to wager on the death of annuitants, carriers, as well as producers, have sufficient tools to prevent these sales.

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