NAIFA GovWatch

NAIFA Opposes Stranger-Originated Annuities in NAIC Testimony

Issue: Stranger-Originated Annuity Transactions (STATs)

Date: May 20, 2010

Action Taken: Earlier today, NAIFA testified at a hearing of the NAIC’s Life Insurance and Annuities Committee in Washington, D.C. which addressed the recent emergence of stranger-originated annuity transactions (STATs).

State lawmakers and regulators are showing considerable interest in STATs, which have come under broad scrutiny following a February 16, 2010 article in the Wall Street Journal. In addition to the NAIC’s public hearing, the National Conference of Insurance Legislators’ Life Insurance Committee discussed STATs at the February 2010 NCOIL meeting and will examine the issue in greater detail at upcoming NCOIL meetings.

In a STAT, an unrelated investor is the purchaser and owner of a variable annuity that is purchased on the life of a terminally ill person. The annuitant typically receives an up-front payment in an amount ranging from $2,000-$10,000 for participating in the transaction, and receives no further payment or benefits from the transaction. The annuity contains a guaranteed death benefit (GDB) provision or rider which guarantees that at the time of the annuitant’s death the owner will receive at least as much as was invested in the annuity, and possibly more depending on market performance and the terms of the rider. Because of the protection provided by the GDB, the investor/owner will likely choose more speculative sub-accounts as the investment vehicles for the STAT. If the market performs well, the investor will benefit from the account’s performance; if the market does not do well, the investor’s investment is protected by the minimum return guaranteed by the GDB.

At the NAIC hearing, NAIFA stated its newly-adopted policy opposing stranger-originated annuity transactions and expressed its concerns about STATs. Based upon the limited information available on STATs, “NAIFA believes stranger-originated annuities share many of the same troublesome characteristics as STOLI transactions. Most significantly, in both situations the transaction is initiated for the benefit of an investor who has no relation to the person whose life the insurance policy or annuity is based upon, and once the transaction is completed, neither the insured nor his or her beneficiaries will have any further interest in the policy or annuity’s benefits.” NAIFA believes that STATs “are contrary to established public policy and could potentially undermine the intended use of life insurance and annuity products to the great detriment of the insurance industry and the American public which relies on our products for protection and financial security.”

NAIFA’s full statement before the NAIC can be read here.

NAIFA Staff Contact: Gary Sanders, Vice President – Securities and State Government Relations, at GSanders@naifa.org.

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