A trade group of insurance and financial service professionals has voiced its opposition to the growing use of stranger-originated annuity transactions (STATs).

The National Association of Insurance and Financial Advisors (NAIFA), representing about 200,000 agents and financial service professionals, voted to oppose the transactions, several weeks ahead of a National Association of Insurance Commissioners’ public hearing May 20 to investigate the practice. The National Conference of Insurance Legislators also intends to investigate STATs at an upcoming meeting.

Thomas D. Currey

“Based upon the limited information available, STATs seem to share some of the same troublesome characteristics as stranger-originated life insurance transactions,” said NAIFA President Thomas D. Currey, in a statement.

“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. Much like with a STOLI transaction, it appears that a STAT is usually not being initiated for a typical or historically legitimate insurance purpose,” Currey said.

Thomas R. Sullivan, the Connecticut insurance commissioner and head of the NAIC’s Life Insurance and Annuity Committee, said he was convening the public hearing so the NAIC can learn more about the practice.

The NAIC, which represents state insurance commissioners, said the hearing will focus on the “suspect practice of targeting seniors and terminally ill patients by inducing them to purchase an annuity largely for the benefit of investors or intermediaries.”

In testimony from consumers, state regulators and industry representatives, the NAIC expects to investigate if the transactions are legal, how they affect insurable interests, whether current model laws and regulations provide enough consumer protection, and what, if any, moves are necessary to tighten or develop better models and regulations.

“I envision hearing from the victims, the consumers who may have been duped, quite frankly,” Sullivan told IFAwebnews.com.

A STAT transaction involves an unrelated investor as the buyer and owner of a variable annuity purchased on the life of a terminally ill person. The individual person typically receives an up-front payment in an amount ranging from $2,000 to $10,000 for participating in the transaction, and receives no further payment or benefits from the transaction, according to NAIFA.

The annuity contains a guaranteed death benefit rider (GDB) which guarantees that at the time of death, the owner/beneficiary 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.