Stranger-Owned Annuities allow investors to purchase an interest in the life of an elderly or terminally ill person, inducing the insured to purchase the policy largely for the benefit of unrelated and sometimes unknown beneficiaries. The NAIC will examine whether greater regulation of the Stranger-Owned Annuity market is warranted and whether consumers are adequately protected.
In recent history, the insurance industry has focused on Stranger-Owned Life Insurance Policies, which are generally disfavored by the industry because they are a speculative investment for disinterested parties. Numerous states have outlawed Stranger Owned Life Insurance as illegal; for example, Indiana classified STOLI policies as unfair and deceptive, and Kentucky has allowed insurers to ask whether the policy holder intends to use premium financing to pay for the policy, and certify that the policy is not being purchased for the purpose of reselling. Ohio requires insurers to enact measures to detect STOLI policies, including asking questions on the application intended to weed out STOLI policies.
Stranger-Owned Annuities are less well known and virtually unregulated, but equally concerning. The investors have no insurable interest in the owner of the annuity, and generally purchase the annuity to receive an enhanced death benefit or some other advantage. And to this point, other than scattered lawsuits challenging the validit of Stranger-Owned Annuities, the market is largely unregulated. Many states have strict laws regarding insurance interests in life insurance policies, but have little or no regulation regarding annuities.
For a copy of the NAIC's press release, click here: https://www.naic.org/Releases/2010_docs/stranger_owned_annuities.htm