NAIC Bulletin on Stranger-Originated Annuities May Lead to New Penalties

The model bulletin is intended to help insurers avoid issuing annuities that will be used as STOA. Insurers are suggested to modify their contracts to adjust commissions if a policy is annuitized or a death benefit is paid within the first year of the policy. This means that producers could face reduced commissions if they sell a policy that is used in transaction that the issuer believes to be part of a STOA arrangement. It doesn't matter whether you're aware of the purpose for which the annuity is being purchased—your commissions will take a hit.

While supporters believe the model bulletin will help weed out improper STOA arrangements, thus protecting both insurers and consumers, critics argue that the model bill puts all STOA transactions in a bad light – even those that are meant to benefit both the STOA originator and the annuitant.

New, stringent application processes could heighten the difficulty of purchasing an annuity for legitimate purposes—especially if the annuity is being purchased by a trust. This becomes problematic because the insurance company must determine whether the trust is merely acting as an agent for a natural person, or whether the trust is being used as cover for a STOA transaction.

Although on its own the bulletin may not have a colossal impact on annuities business, it's only a first drop in a gathering storm of interest in STOA. Expect state regulators to tighten annuities regulations as they have with life insurance in response to STOLI.

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See also The Law Professor's blog at AdvisorFYI.