Key Takeaways
- Colorado requires clear disclosure of all surrender charges before an annuity sale is completed
- Producers must explain the complete surrender charge schedule including how charges decline over time
- Free withdrawal provisions must be clearly disclosed along with any limitations
- Market Value Adjustments (MVAs) must be disclosed with explanation of potential positive and negative impacts
- Colorado scrutinizes annuities with excessive surrender charges or unreasonably long surrender periods
Colorado Annuity Surrender Charges and Disclosures
Colorado requires clear and complete disclosure of annuity surrender charges to protect consumers from unexpected penalties.
Surrender Charge Disclosure Requirements
What Must Be Disclosed
Before completing an annuity sale:
| Disclosure Item | Requirement |
|---|---|
| Surrender Schedule | Complete schedule for all years |
| Declining Schedule | How charges decrease over time |
| Free Withdrawal | Amount available without penalty |
| Penalty-Free Events | Death, disability, nursing home |
| MVA Impact | Market Value Adjustment effects |
Timing of Disclosures
- Before the application is signed
- In writing (not just verbal)
- In clear, understandable language
- With opportunity for questions
Common Surrender Charge Structures
Typical Declining Schedule
| Year | Sample Charge |
|---|---|
| 1 | 8% |
| 2 | 7% |
| 3 | 6% |
| 4 | 5% |
| 5 | 4% |
| 6 | 3% |
| 7 | 2% |
| 8 | 1% |
| 9+ | 0% |
Free Withdrawal Provisions
Most annuities allow penalty-free withdrawals:
- Typically 10% of contract value per year
- May accumulate if not used
- First-year restrictions may apply
- RMDs often penalty-free
Exam Tip: Always disclose the free withdrawal percentage AND any limitations or restrictions that apply.
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
Producers must:
- Explain MVA can increase OR decrease value
- Provide examples of MVA impact
- Not minimize risk of negative adjustment
- Disclose in writing
Penalty-Free Surrender Events
Colorado requires disclosure of penalty-free events:
Common Penalty-Free Events
| Event | Description |
|---|---|
| Death | Full value to beneficiary |
| Terminal Illness | Waiver if diagnosed |
| Nursing Home | Waiver after confinement period |
| Disability | Waiver for total disability |
| Annuitization | Waiver if annuitized |
Required Disclosures
For each penalty-free event:
- Triggering conditions
- Required documentation
- Time limits or waiting periods
- Any exceptions
Replacement Surrender Charge Disclosures
When replacing existing annuities:
Comparison Requirements
| Item | Old Contract | New Contract |
|---|---|---|
| Current surrender period | Remaining years | Total years |
| Current surrender charge | Current % | Starting % |
| Free withdrawal | Available amount | New provisions |
Consumer Acknowledgment
Consumer must sign acknowledging:
- Understanding of new surrender period
- That old charges may still apply
- Loss of benefits from existing contract
- Reason why replacement benefits them
DOI Regulatory Scrutiny
Colorado DOI reviews surrender charges for appropriateness:
Excessive Charges
DOI scrutinizes:
- Charges significantly above market average
- Charges that don't decline reasonably
- Hidden or unclear charge structures
Inappropriate Products
Red flags include:
- Surrender periods extending past life expectancy
- Products with limited liquidity for those needing access
- Complex products for unsophisticated consumers
Best Practices for Producers
Disclosure Best Practices
| Practice | Benefit |
|---|---|
| Use visual aids | Helps consumer understand |
| Show examples | Makes charges concrete |
| Document discussion | Protects producer |
| Allow questions | Ensures understanding |
| Follow up | Confirms comprehension |
What to Emphasize
- Total years of surrender period
- First-year and declining charges
- Free withdrawal amount and restrictions
- Penalty-free surrender events
- Impact of early withdrawal
Consequences of Inadequate Disclosure
| Issue | Potential Consequence |
|---|---|
| Failure to disclose | Disciplinary action |
| Incomplete disclosure | Consumer complaint |
| Misleading disclosure | License suspension |
| Pattern of issues | License revocation |
Exam Tip: Colorado requires surrender charge disclosures BEFORE the sale. Producers must give consumers time to understand charges before committing to purchase.
When must surrender charge disclosures be provided in Colorado?
What is a Market Value Adjustment (MVA)?
What percentage free withdrawal do most annuities typically allow annually?
Which is typically a penalty-free surrender event for annuities?
What must be disclosed when replacing an existing annuity in Colorado?