2.2 Hawaii Annuity Regulations

Free Look and Required Disclosures

Hawaii law (HRS 431:10D-603) requires that an annuity buyer receive a disclosure document and the NAIC Buyer's Guide to fixed deferred annuities. The timing of delivery controls the free look:

The 15-day figure is the most-missed annuity number in Hawaii. It is not the same 10 days as individual life, and it is triggered specifically when the disclosure materials were late. During the free look the owner returns the contract for a full refund of premium (for variable and registered index-linked annuities, the refund may equal account value plus any fees deducted).

Suitability and Best-Interest Standard

Hawaii has adopted the NAIC Suitability in Annuity Transactions Model Regulation, including the revised best-interest standard. Before recommending or selling an annuity, the producer must act without placing their own financial interest ahead of the consumer's and must satisfy four obligations:

1. Care — gather the consumer's suitability information and have a reasonable basis to believe the annuity effectively addresses the consumer's needs.
2. Disclosure — describe the producer's role, the products offered, and how the producer is compensated (including cash and non-cash).
3. Conflict of interest — identify and avoid or reasonably manage material conflicts.
4. Documentation — make a written record of any recommendation and the basis for it.

Suitability Information the Producer Must Collect

If the consumer refuses to give suitability information, the producer may proceed only with a signed acknowledgment that no recommendation could be made; the producer cannot simply guess and sell. A recommendation made without this information, or one the file cannot justify, is the classic violation the examiners test.

Producer Training Requirement

A producer may not sell annuities in Hawaii until completing a one-time annuity training course (a four-credit course covering annuity types, contract provisions, taxation, and suitability obligations) approved by the Commissioner, plus product-specific training for each annuity offered. A producer who completes this once does not repeat it for license renewals, but must complete additional training within prescribed timeframes if the suitability rules are materially updated.

Surrender Charges and the Free-Look Decision

Deferred annuities impose surrender charges during the surrender period — typically a declining schedule such as 7% in year one stepping down to 0% after seven to ten years. A producer must disclose:

• The length and percentages of the surrender-charge schedule.
• Bonus recapture: any premium bonus that is forfeited or recaptured on early surrender.
• Tax consequences: gains are taxed as ordinary income, and a federal 10% penalty generally applies to taxable withdrawals before age 59½.
• Market Value Adjustment (MVA), where applicable, which can increase or decrease the surrender value with interest-rate movements.

Worked example: A 68-year-old retiree with limited liquid savings is shown a 10-year annuity with a 9-year surrender schedule. Because the client may need principal for medical costs within five years, surrendering early would trigger surrender charges plus an MVA — the recommendation likely fails the best-interest standard on the liquidity needs and time horizon factors, and a properly documented file would reflect that concern.

Replacement and Exchange Cautions

Replacing one annuity with another (or a 1035 exchange) must clear suitability and the replacement rules in 2.3. A producer who restarts a fresh surrender schedule or loses an existing bonus to chase a new commission is engaged in conduct the best-interest rule is designed to stop.

Common Exam Traps

• Confusing the 15-day late-disclosure annuity free look with the 10-day life free look.
• Treating suitability as a one-page form rather than a documented, best-interest analysis.
• Forgetting that annuity training is required before the first sale, separate from continuing education.
• Assuming variable annuity refunds equal premium — they may equal account value.
• Forgetting that a refusal to share information requires a signed acknowledgment, not a sale on assumptions.

Annuity Taxation Quick Reference

Because suitability hinges on tax status, the exam expects you to know the basics cold:

A producer who recommends a deferred annuity to a client who needs income next year, or who places non-qualified money where a simpler vehicle would serve, has likely missed the tax status and time horizon factors — exactly the gaps a documented suitability analysis is meant to catch.

Exam Focus: Read each annuity scenario for age, liquidity needs, time horizon, and existing coverage. If an answer choice skips disclosure, suitability documentation, or the best-interest obligation, it is almost always the wrong (or prohibited) action.