Key Takeaways
- Arizona requires clear disclosure of all surrender charges before an annuity sale is completed
- Producers must explain the complete surrender charge schedule including declining schedules
- Free withdrawal provisions must be clearly disclosed including any limitations or conditions
- Surrender charge disclosures must be provided in writing and acknowledged by the consumer
- Arizona scrutinizes annuities with excessive surrender charges or unreasonably long surrender periods
Arizona Annuity Surrender Charges and Disclosures
Arizona requires clear and complete disclosure of annuity surrender charges to protect consumers from unexpected penalties when accessing their funds.
Surrender Charge Disclosure Requirements
What Must Be Disclosed
Before completing an annuity sale, producers must disclose:
| Disclosure Item | Requirement |
|---|---|
| Surrender Schedule | Complete schedule for all years |
| Declining Schedule | How charges decrease over time |
| Free Withdrawal | Annual amount available without penalty |
| Penalty-Free Events | Death, disability, nursing home |
| Impact on Value | How withdrawals affect contract |
| Comparison | For replacements, compare to existing |
Timing of Disclosures
Disclosures must be made:
- Before the application is signed
- In writing (not just verbal)
- In clear, understandable language
- With opportunity for questions
Exam Tip: Arizona requires surrender charge disclosures BEFORE the sale, not after. Producers must give consumers time to understand the charges before committing.
Common Surrender Charge Structures
Typical Declining Schedule
| Year | Sample Surrender Charge |
|---|---|
| 1 | 7% |
| 2 | 6% |
| 3 | 5% |
| 4 | 4% |
| 5 | 3% |
| 6 | 2% |
| 7 | 1% |
| 8+ | 0% |
Free Withdrawal Provisions
Most annuities allow some penalty-free withdrawals:
- Typically 10% of contract value per year
- May accumulate if not used
- First-year restrictions may apply
- Required minimum distributions (RMDs) often penalty-free
Market Value Adjustments (MVAs)
Some annuities include Market Value Adjustments:
How MVAs Work
| Scenario | Effect |
|---|---|
| Interest rates rise | MVA may reduce surrender value |
| Interest rates fall | MVA may increase surrender value |
| Held to maturity | No MVA applies |
MVA Disclosure Requirements
- Must explain MVA can increase OR decrease value
- Must provide examples of MVA impact
- Cannot minimize risk of negative adjustment
- Must be disclosed in writing
Penalty-Free Surrender Events
Arizona requires disclosure of penalty-free surrender provisions:
Common Penalty-Free Events
| Event | Description |
|---|---|
| Death | Full value to beneficiary without surrender charge |
| Terminal Illness | Waiver if diagnosed with terminal illness |
| Nursing Home Confinement | Waiver after specified confinement period |
| Disability | Waiver for total disability |
| Annuitization | Waiver if contract is annuitized |
Specific Disclosure Requirements
For each penalty-free event, disclose:
- Triggering conditions
- Required documentation
- Time limits or waiting periods
- Any restrictions or exceptions
Replacement Surrender Charge Disclosures
When replacing an existing annuity, additional disclosures:
Comparison Requirements
| Item | Old Contract | New Contract |
|---|---|---|
| Current surrender period | Remaining years | Total years |
| Current surrender charge | Current % | New starting % |
| Free withdrawal | Available amount | New provisions |
| Penalties waived | Accumulated | Lost |
Consumer Acknowledgment
The consumer must sign acknowledging:
- Understanding of new surrender charge period
- That old surrender charges may apply
- Any loss of benefits from existing contract
- Reason for replacement
Arizona Regulatory Scrutiny
DIFI reviews annuity surrender charges for:
Excessive Charges
- Charges significantly higher than market average
- Charges that don't decline reasonably
- Hidden or unclear charge structures
Inappropriate Products
- Surrender periods extending past reasonable life expectancy
- Products with limited liquidity for those needing access
- Complex structures for unsophisticated consumers
Exam Tip: Arizona doesn't set specific maximum surrender charges, but DIFI scrutinizes charges that appear excessive or inappropriate for the consumer's circumstances.
When must surrender charge disclosures be provided for an annuity sale in Arizona?
What is a Market Value Adjustment (MVA) on an annuity?
Which of the following is typically a penalty-free surrender event for annuities?
What must be disclosed when replacing an existing annuity in Arizona?
What percentage free withdrawal do most annuities typically allow annually?