2.2 North Carolina Annuity Regulations

The Best Interest Standard

Effective January 1, 2023, North Carolina adopted the National Association of Insurance Commissioners (NAIC) Suitability in Annuity Transactions Model Regulation (Model #275), becoming the 26th state to do so. This upgraded the older "suitability" rule into a best interest standard aligned with the U.S. Securities and Exchange Commission's Regulation Best Interest. A producer satisfies the standard by meeting four obligations:

Best interest does not mean the cheapest or highest-yield product. It means the producer did not place its own compensation ahead of the consumer's interest. A producer who sells a suitable annuity but chose it because it paid the largest commission has violated the conflict-of-interest obligation.

Free Look on Annuities

The period runs from contract delivery. During it the owner may return the contract for a refund. For variable annuities the refund is usually account value (market risk passes to the owner); for fixed annuities it is the full premium.

The Consumer Profile (Suitability Information)

Before recommending, the producer must make reasonable efforts to obtain and record the consumer's profile:

• Financial status — income, net worth, liquid assets
• Tax status — bracket; qualified vs. non-qualified funds
• Liquidity needs — anticipated need to access cash
• Financial time horizon — when funds will be needed
• Risk tolerance, including capacity to absorb loss
• Existing assets — current annuities, life insurance, investments
• Financial objectives and intended use of the annuity

A refusal to provide this information must be documented; the producer may then proceed only if there is still a reasonable basis for the recommendation.

Senior-Specific Protections

North Carolina applies heightened scrutiny to sales to consumers age 65 and older, who are statistically targeted for unsuitable annuities with long surrender schedules.

• 30-day free look instead of 10 days.
• Plain-language explanation of the surrender charge schedule and its duration.
• Disclosure of liquidity limitations — how much can be withdrawn penalty-free each year (commonly 10%).
• Consideration of proximity to or status in retirement and the buyer's need to access principal.

Scenario: A 78-year-old with modest income and high medical costs is sold a deferred annuity with a 9-year surrender period and a 9% first-year surrender charge. Even if the paperwork is complete, this likely fails the care obligation because the long illiquidity does not match the consumer's near-term need for funds.

Surrender Charge Disclosure

Many fixed deferred annuities use a declining surrender charge (for example 8/7/6/5/4/3/2/1/0%). A bonus or market value adjustment (MVA) annuity may carry longer or steeper charges, increasing the suitability burden.

Producer Training and Recordkeeping

• A producer may not solicit annuities until completing a one-time, four-hour annuity best interest training course plus any product-specific training required by the insurer.
• Producers and insurers must maintain records demonstrating compliance — the consumer profile, disclosures, and the basis for the recommendation — and produce them on NCDOI request.
• The insurer is responsible for supervising producer recommendations, including a system to detect unsuitable transactions and inappropriate replacements.

Annuity Replacements Under the Best Interest Rule

Replacing one annuity with another adds a sixth layer of scrutiny because surrender charges and new lock-up periods can erase the consumer's value. Before recommending an annuity replacement, the producer must consider whether the consumer:

• Will incur a surrender charge or lose an existing bonus, benefit, or guaranteed rate;
• Is starting a new surrender period and a new set of fees;
• Would benefit from features the new contract actually adds (a higher guaranteed rate, a needed income rider) versus features they already have.

A pattern of replacements that mainly restart surrender schedules is treated as evidence the recommendation was not in the consumer's best interest. The producer should document the specific consumer benefit that justifies the exchange.

Safe Harbor for Other Regulated Sales

The rule includes a safe harbor: a recommendation made by a producer who is also subject to and complies with comparable standards — such as the SEC's Regulation Best Interest for securities, or ERISA/IRS fiduciary rules for qualified plans — is deemed to satisfy North Carolina's best interest standard for the same transaction. This prevents duplicative, conflicting obligations on the same sale.

Exam Tip: The four obligations are Care, Disclosure, Conflict of interest, Documentation. If a question describes a producer who recommended a suitable product but hid how they were paid, the violation is disclosure / conflict of interest, not suitability.