State insurance regulators are cracking down on stranger-originated annuity (STOA) transactions, and it could affect your annuities business. You will see stricter compliance procedures and could face reduced commissions—regardless of whether you’re knowingly selling annuities as part of a STOA scheme.

These changes will trickle down from the National Association of Insurance Commissioners’ (NAIC) Life Insurance and Annuities Committee, which approved a model bulletin on STOA on March 27. Although state insurance regulators aren’t required to adopt the bulletin, many certainly will distribute the bulletin to carriers operating in their jurisdiction.

What Is a STOA transaction?

In a STOA transaction, investors or producers offer to pay a nominal fee to an individual as compensation for using the individual’s identity to purchase an annuity offering a high return in the form of a guaranteed death benefit. Those selected for participation are usually in poor or deteriorating health and are unlikely to live past the first year of the policy. They often are targeted via newspaper advertisements and solicitations in nursing homes and hospices.  

Although STOA hasn’t received the same amount of press as its cousin STOLI (stranger-originated life insurance), STOA is starting to make waves with regulators and the financial services media.

How the Model Bulletin Will Affect You

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.