5.2 Pennsylvania Annuity Disclosure Requirements

Buyer's Guide and Disclosure Document

For any annuity recommendation, the producer must deliver two consumer documents — the NAIC Annuity Buyer's Guide and an annuity disclosure document describing the specific contract — at or before the time of application.

The Buyer's Guide is generic education: how annuities work, fixed vs. variable vs. indexed types, how interest is credited, surrender charges, tax treatment, and questions to ask. The disclosure document is contract-specific and must state the guaranteed and non-guaranteed elements, the surrender schedule, fees, and any market-value adjustment.

Fee and Surrender-Charge Disclosure

All costs must be disclosed in writing before purchase. The most heavily tested item is the surrender charge.

A typical fixed deferred annuity surrender schedule declines over time, e.g., 7% in year 1, then 6, 5, 4, 3, 2, 1, then 0% after year 7. The contract usually allows a free withdrawal (often up to 10% of value per year) without a charge. Worked example: a consumer with a $100,000 contract in surrender year 3 (5%) who withdraws $30,000 may take 10% ($10,000) free, and the remaining $20,000 incurs a 5% charge = $1,000. Failing to disclose this schedule is a serious violation.

Exam tip: Under the best interest disclosure obligation, the producer must also give a written statement of their role, the products/insurers they can offer, and the cash and non-cash compensation they receive — not just the contract fees.

Free Look / Unconditional Refund

Pennsylvania gives the consumer a right to return the contract for a full refund of premium during a free look (also called the unconditional-refund period). The period begins on the date the policy is delivered.

There is no separate, longer statutory free look that lengthens to 30 days for annuity buyers age 65+ in Pennsylvania — that 30-day figure belongs to other states (for example, California) and is a frequent exam distractor. During the Pennsylvania free look the consumer may return the annuity, no questions asked, and receive a full refund of premium with no surrender charges or fees deducted (for variable contracts the refund may equal account value if a market-loss provision applies).

Common trap: Memorize 10 days standard / 20 days on a replacement. If a question describes a senior buyer, the period does not automatically jump to 30 days in Pennsylvania.

Guaranteed vs. Non-Guaranteed Elements

Every illustration and disclosure must clearly separate what is promised from what is projected.

Non-guaranteed and assumed figures must be labeled as such, and projections may not be presented as if guaranteed.

Replacement Disclosures

A replacement triggers extra protection under 31 Pa. Code Chapter 81. The producer must:

• Provide a Notice Regarding Replacement signed and dated by the applicant.
• Furnish a comparison of the existing and proposed contracts (values, benefits lost, surrender charges, new surrender period, tax consequences).
• Give the existing insurer the chance to conserve the business.

The replacement notice must show the 20-day unconditional refund right. A producer who 'churns' contracts — replacing to generate commissions without consumer benefit — violates both the replacement rules and the best interest standard.

Tax-Disclosure Points the Exam Tests

Annuity disclosures intersect with federal tax rules the Pennsylvania exam expects you to know and convey accurately:

A producer who pitches "tax-free growth" is misrepresenting the product — growth is tax-deferred, not tax-free. On a replacement, the disclosure must explain that a Section 1035 exchange avoids current tax but does not avoid a fresh surrender schedule. Worked example: a consumer exchanges a contract that just exited its surrender period into a new annuity with a 7-year schedule. The transaction may be tax-neutral, yet it re-locks the funds for seven years — a fact that must be disclosed and weighed in the best interest analysis.

Indexed and Variable Annuity Disclosure Add-Ons

Product type changes the disclosure burden:

• Fixed indexed annuities — must disclose the participation rate, cap rate, and spread/margin, and that these can be changed by the insurer at renewal, plus any market-value adjustment.
• Variable annuities — require a prospectus, disclosure of subaccount risk (the consumer can lose principal), M&E charges, and the difference between the contract value and any guaranteed living-benefit base.

Exam tip: The single most-tested disclosure failure is an undisclosed or misexplained surrender charge. The second is presenting non-guaranteed index caps or current rates as if they were guaranteed. Anchor both to written, pre-purchase disclosure.