5.1 Annuity Disclosure Requirements

The North Carolina Disclosure Framework

North Carolina regulates annuity disclosure through Title 11, Chapter 12 of the North Carolina Administrative Code, which mirrors the National Association of Insurance Commissioners (NAIC) Annuity Disclosure and Suitability model regulations. The goal is simple: a consumer should understand what they are buying before the contract is issued, not after the free-look clock has started. Two documents anchor the requirement.

Buyer's Guide and Disclosure Document

The Buyer's Guide is generic education: it explains what an annuity is, the difference between fixed, indexed, and variable contracts, how earnings grow tax-deferred, and the questions a buyer should ask. The Disclosure Document is product-specific and must be signed or acknowledged.

If the application is taken by mail or electronically and the Buyer's Guide and Disclosure Document were not delivered at application, North Carolina requires they be delivered no later than policy delivery, and the contract carries a free-look period of at least 15 days in that situation (longer than the standard 10 days) so the consumer can review.

Required Content of the Disclosure Document

The Disclosure Document must clearly state, in plain language:

• The generic name of the contract and whether it is fixed, indexed, or variable
• The full surrender-charge schedule — percentage and duration (e.g., 7% declining to 0% over 7 years)
• Any market value adjustment (MVA) and how it can raise or lower the surrender value
• The interest-crediting method for indexed products (cap, participation rate, spread, floor)
• All fees and charges: annual contract fee, rider charges, and for variable contracts the mortality and expense (M&E) charge and subaccount expenses
• Death-benefit, annuitization, and free-withdrawal (typically 10% per year) provisions
• Tax-deferral explanation and any premium tax that applies

Exam trap: Candidates confuse the Buyer's Guide (generic) with the Disclosure Document (contract-specific). North Carolina requires BOTH, and both must reach the applicant at or before application, not merely at policy delivery.

Why timing matters

The at-or-before-application rule exists so the consumer can compare products while still shopping, not after emotional commitment. If a producer hands over the Disclosure Document only at policy delivery on a face-to-face sale, the disclosure obligation has been violated even if every fee was eventually disclosed. North Carolina examiners frequently frame this as a sequencing question: the educational Buyer's Guide and the product-specific summary precede or accompany the signed application.

For a replacement, the disclosure must also identify the existing contract being replaced and quantify any surrender charges, lost guarantees, or new surrender period the consumer is taking on, so disclosure and the replacement comparison work together.

Illustration Requirements

For fixed indexed and variable annuities, North Carolina follows the NAIC Annuity Disclosure rule's illustration standards. An illustration is not required for a plain fixed annuity, but if one is used, it cannot show non-guaranteed elements more favorably than the contract permits.

Fixed Indexed Annuity Illustration

The illustration must include a signed acknowledgment and a statement that the non-guaranteed values are hypothetical and not promised. A common compliance failure is illustrating only the best-case index period — North Carolina expects the illustration to be balanced.

Qualified vs. Non-Qualified Tax Disclosure

Producers must explain how the funding source changes taxation, because recommending an annuity inside an already tax-deferred account (like an IRA) provides no additional tax shelter and can be a suitability red flag.

Worked example

A client puts $100,000 of after-tax money into a non-qualified deferred annuity. Years later it is worth $140,000. Because non-qualified annuities are taxed LIFO, the first $40,000 withdrawn is treated as earnings taxed as ordinary income (plus the 10% penalty if under 59½); only after the gain is exhausted does the original $100,000 basis come out tax-free.

Exam tip: "All distributions taxed as ordinary income" describes a qualified annuity. For a non-qualified annuity, only the earnings are taxable, and they come out first under LIFO.

Exchanges and the 1035 disclosure

Producers must also explain when a tax-free Section 1035 exchange is available — swapping one non-qualified annuity for another, or a life policy into an annuity, without triggering current tax on the gain. A 1035 exchange preserves the cost basis but does not reset surrender charges: the consumer can start a brand-new surrender schedule on the receiving contract. North Carolina treats a 1035 exchange of an annuity as a replacement, so the full replacement disclosure and comparison still apply.

This is a frequent exam trap — "tax-free" does not mean "charge-free" or "disclosure-free." The producer must show the consumer is not simply restarting a long surrender period to generate a new commission.