2.2 Washington Annuity Regulations

Free Look and Refund

Annuity contracts sold in Washington carry a right to examine (free look): the owner may return the contract within the printed examination period for a refund. For a fixed annuity the refund is the consideration (premium) paid; for a variable annuity the refund may equal account value (which can be more or less than premium) because the money was at market risk during the period. The contract must print the return notice, mirroring the life rule in RCW 48.23.380. Treat 10 days as the baseline state floor for a fixed annuity unless the specific contract or a market-conduct rule states longer.

Best-Interest Suitability — WAC chapter 284-23

Washington adopted the NAIC Suitability in Annuity Transactions Model Regulation, upgraded to the best-interest standard. Before recommending or exchanging an annuity, the producer must act in the consumer's best interest, satisfying four obligations:

1. Care obligation — have a reasonable basis to believe the recommendation effectively addresses the consumer's needs and that the consumer would benefit.
2. Disclosure obligation — give a written disclosure of the producer's role, products offered, and how they are compensated (commission, fees).
3. Conflict-of-interest obligation — identify and avoid or reasonably manage material conflicts; sales contests based on a specific product are prohibited.
4. Documentation obligation — record the basis for the recommendation and keep it.

Consumer Profile Information the Producer Must Gather

Worked example: A producer recommends a 10-year surrender-charge deferred annuity to an 82-year-old who states she needs the principal liquid within two years for assisted-living costs. Even with a signed application, this fails the care obligation — the long surrender schedule defeats her stated liquidity need, and the file documents an unsuitable recommendation.

Disclosure Requirements

Before the application is signed (or, for direct-response sales, at delivery with a refund notice), the producer must deliver the NAIC Annuity Buyer's Guide and a product disclosure. The disclosure must spell out, in plain language:

• The full surrender-charge schedule and its duration
• All fees and expenses (mortality, administrative, rider charges)
• Guaranteed vs. non-guaranteed values, clearly labeled
• The free-withdrawal allowance (commonly 10% per year)
• Death-benefit and annuitization provisions
• Any market value adjustment (MVA) on early surrender

Exam tip: Illustrated non-guaranteed values are projections, not promises. Presenting them as guaranteed is a misrepresentation under RCW 48.30.040.

Surrender Charges and Free Withdrawal

A surrender charge is a declining penalty for early withdrawal that lets the insurer recover acquisition costs. Washington does not fix a single statewide percentage, but the OIC reviews schedules for fairness and requires full written disclosure. A typical schedule:

Most contracts allow a 10% free withdrawal each year without charge; amounts above that incur the surrender percentage.

Exchanges and Replacements — RCW 48.23.015

RCW 48.23.015 governs purchasing or exchanging annuities. When an existing annuity is being replaced, the producer must give the applicant a side-by-side comparison so the consumer sees the surrender charge on the old contract, the new surrender period that restarts, and any lost guaranteed rate. The replacement rules in WAC chapter 284-23 (Section 2.3) layer on top.

Red flags the OIC pursues in annuity sales:

• Replacing a contract still inside its surrender period, costing the consumer a penalty
• Restarting a fresh 8-year surrender schedule with no offsetting benefit
• Selling a deferred annuity with a long surrender term to a consumer with near-term liquidity needs
• Misrepresenting non-guaranteed illustrated values as guaranteed

Common trap: A signed suitability form does not cure an unsuitable sale. The producer must have a reasonable basis at the time of recommendation; the documentation only memorializes that analysis.

Tax Treatment the Producer Must Understand

Suitability hinges on tax facts, so the exam expects producers to apply them:

• Tax-deferred growth: earnings inside an annuity are not taxed until withdrawn.
• LIFO ordering for non-qualified annuities: withdrawals come out earnings-first and are ordinary income.
• 10% IRS penalty on the taxable portion of withdrawals before age 59 1/2 (with exceptions for death, disability, or substantially equal payments).
• Section 1035 exchange: an annuity-to-annuity (or life-to-annuity) swap can be tax-free, but the surrender-charge and suitability analysis still applies — a 1035 label never excuses an unsuitable replacement.

Worked example: Recommending a non-qualified deferred annuity to a 55-year-old who will need the money at 58 invites the 10% early-withdrawal penalty and surrender charges — a documented care-obligation problem.

Enforcement and Producer Liability

The OIC examines producer files in market-conduct exams. An unsuitable annuity sale can trigger, under RCW 48.30 and RCW 48.17:

Insurers must also supervise producers and may not delegate away their oversight duty. A producer who follows the four obligations, documents the profile, and matches the product to a genuine need is protected; one who sells from a rate sheet is exposed.