The national guide explains how annuities work:

• Phases: accumulation and payout.
• Types: fixed, variable and indexed; immediate and deferred.
• Payout options: life only, period certain, joint and survivor.
• Other features: surrender charges and 1035 exchanges.

Hawaii's state questions focus on three sets of rules: the annuity best interest standard (HRS 431:10D-621 ff.), the annuity disclosure rules (HRS 431:10D-601 ff.), and the training required before selling annuities.

National concepts in brief

• The annuitant is the measuring life for income payments. The owner controls the contract.
• Life-only pays the largest income but stops at death. Period certain and joint and survivor options trade some income for guarantees.
• Fixed annuities guarantee a minimum rate. Variable annuities shift investment risk to the owner and require the variable line of authority (HRS 431:9A-103(c)).
• Surrender charges apply to early withdrawals. A 1035 exchange defers tax on a swap of contracts.

Best interest standard

When recommending an annuity, a Hawaii producer must act in the consumer's best interest and may not put the producer's or insurer's financial interest ahead of the consumer's (HRS 431:10D-623(a)). The producer meets the standard by satisfying four obligations:

1. Care. Know the consumer's financial situation, needs and objectives, and have a reasonable basis for the recommendation. Consumer profile information includes:

   • age, income, financial situation and experience;
   • objectives, time horizon and liquidity needs;
   • existing assets, liquid net worth, risk tolerance and tax status (HRS 431:10D-622).

   The care obligation does not require recommending the annuity with the lowest commission (HRS 431:10D-627(e)).

2. Disclosure. Before recommending, disclose on a form similar to the NAIC model's Appendix A:

   • the producer's role;
   • which products the producer can sell and which insurers the producer represents;
   • how the producer is paid.

   If the consumer asks, give a reasonable estimate of the cash compensation (HRS 431:10D-628).

3. Conflict of interest. Identify and avoid material conflicts, or disclose and manage them.

4. Documentation. Record the recommendation and its basis in writing.

Exchanges and replacements: the producer must weigh:

• surrender charges and benefits lost;
• new fees;
• whether the consumer gains a substantial benefit;
• whether the consumer has had another exchange or replacement in the past 60 months (HRS 431:10D-627(f)).

No care obligation applies when (HRS 431:10D-623(b)):

• no recommendation was made;
• the recommendation rested on materially inaccurate information from the consumer;
• the consumer refused to give profile information and no recommendation was made.

Insurer supervision: the insurer must have a system to review recommendations. It must also identify and eliminate sales contests, quotas and bonuses tied to specific annuities within a limited period (HRS 431:10D-623(d)).

Records: insurers and producers keep records of the information collected, the disclosures made and the basis for recommendations for five years after the transaction (HRS 431:10D-625).

Annuity training

• A producer who received the life line of authority after December 31, 2022 may not sell annuities until completing an approved annuity training course of at least four CE credits (HRS 431:10D-626).
• The insurer must verify the training before letting the producer sell its annuities. It may check certificates or use a reliable database vendor.

Disclosure: buyer's guide and disclosure document

For annuities subject to the disclosure rules (HRS 431:10D-603):

• If the application is taken in a personal meeting, give the buyer's guide and disclosure document at or before the time of application.
• If it is taken another way, send them within five business days after the insurer receives the application.
• If they were not given at or before application, the buyer gets a free look of at least 15 days, running at the same time as any other free look.
• During the accumulation period, the insurer sends a status report at least annually. It shows values, amounts credited or charged, and any loans (HRS 431:10D-604).

The disclosure rules do not apply to (HRS 431:10D-602):

• variable annuities, registered or not;
• annuities with no non-guaranteed elements;
• many employer plans;
• structured settlements and funding agreements.

Other Hawaii rules that touch annuities

• Replacement: the life and annuity replacement rules apply. That includes the 30-day right to return the new contract (for a variable contract, the refund is cash value plus charges). The replacing insurer notifies the existing insurer within five business days (HRS 431:10D-505).
• Senior designations: a misleading or self-conferred senior-specific title is an unfair and deceptive act (HRS 431:10D-642).
• Guaranty association: annuity values are protected up to $250,000 in present value (HRS 431:16-203). Portions where the owner bears the investment risk, such as variable subaccounts, are not covered. A separate written notice must say so.

Common exam traps

• The standard is best interest. Its four parts are care, disclosure, conflict of interest and documentation.
• Best interest does not mean recommending the cheapest or lowest-commission product.
• New life licensees need 4 credits of annuity training before selling annuities.
• If the buyer's guide was late, the buyer gets a 15-day free look. A replacement gets a 30-day return right.
• Annuity sale records are kept for 5 years. The look-back for prior exchanges is 60 months.