Suitability Requirements
Selling variable life insurance products requires additional qualifications and responsibilities beyond those for traditional life insurance. Understanding suitability requirements is essential for compliance and client protection.
Securities Licensing Requirements
Because variable products are securities, agents must hold appropriate securities licenses in addition to their state insurance license.
Required Licenses
| License | Description | Required For |
|---|---|---|
| State insurance license | Authorizes sale of insurance products | All life insurance |
| Series 6 | Investment company products | Variable life, variable annuities |
| Series 7 | General securities representative | Variable products + broader securities |
| Series 63/65/66 | State securities registration | May be required by state |
The Licensing Structure
| Product | Insurance License | Securities License |
|---|---|---|
| Term life | Required | Not required |
| Whole life | Required | Not required |
| Universal life | Required | Not required |
| Variable life | Required | Required (Series 6 or 7) |
| VUL | Required | Required (Series 6 or 7) |
Exam Tip: To sell variable products, you need BOTH an insurance license AND a securities license (Series 6 or 7).
FINRA Suitability Rules
Variable product sales are subject to FINRA's suitability requirements under FINRA Rule 2111.
The Suitability Obligation
Before recommending a variable product, the registered representative must:
- Have a reasonable basis for believing the recommendation is suitable
- Consider the customer's investment profile
- Document the basis for the recommendation
Three Components of Suitability
| Component | Description |
|---|---|
| Reasonable-basis suitability | The product is suitable for at least some investors |
| Customer-specific suitability | The product is suitable for this particular customer |
| Quantitative suitability | The number of transactions is suitable (not excessive) |
Customer Investment Profile
A suitability analysis requires understanding the customer's investment profile.
Information to Gather
| Factor | Why It Matters |
|---|---|
| Age | Time horizon and risk capacity |
| Income | Ability to pay premiums |
| Net worth | Overall financial picture |
| Investment objectives | What the client wants to achieve |
| Investment experience | Level of sophistication |
| Risk tolerance | Comfort with volatility and loss |
| Time horizon | How long before funds are needed |
| Liquidity needs | Need for accessible funds |
| Tax status | Tax implications of the product |
| Existing holdings | Other investments owned |
Risk Tolerance Assessment
Assessing risk tolerance is critical for variable product suitability.
Risk Tolerance Levels
| Level | Description | Suitable Products |
|---|---|---|
| Conservative | Preservation of capital; low risk | Fixed products, bonds, money market |
| Moderate | Balance of growth and safety | Balanced funds, some equities |
| Aggressive | Growth-oriented; accepts volatility | Stock funds, growth funds |
| Speculative | Maximum growth; high risk tolerance | Aggressive growth, specialty |
Questions to Assess Risk Tolerance
- How would you react to a 20% decline in value?
- What is your primary investment goal?
- How long until you need this money?
- What percentage of loss can you tolerate?
- Have you invested in stocks or mutual funds before?
Documentation Requirements
All suitability analyses must be documented.
What to Document
| Item | Purpose |
|---|---|
| Customer information | Investment profile data |
| Product recommendation | What was recommended and why |
| Suitability analysis | How the product fits the customer's profile |
| Disclosures made | What risks and features were explained |
| Customer acknowledgments | Signatures confirming understanding |
Maintaining Records
- FINRA requires records be kept for specified periods
- Documentation protects both the client and representative
- Supervisory review of recommendations is required
Prospectus Delivery
A prospectus must be provided before or at the time of sale.
Prospectus Requirements
| Requirement | Description |
|---|---|
| Timing | Before or at time of sale |
| Format | Full prospectus or summary prospectus |
| Updates | Annual updates must be provided |
| Language | Must be clear and understandable |
What the Prospectus Discloses
- Product description and features
- All fees and charges
- Investment options and risks
- Surrender charges
- Death benefit provisions
- Tax information
Replacement Considerations
Special rules apply when a variable product replaces an existing policy.
Replacement Analysis
When replacing existing coverage, the agent must:
- Compare costs and benefits of both policies
- Consider surrender charges on existing policy
- Evaluate new contestability period
- Document reasons for the replacement
- Ensure replacement is in client's best interest
Warning Signs of Unsuitable Replacement
- High surrender charges on existing policy
- Loss of favorable features
- New contestability period for health issues
- Higher overall costs
- No clear benefit to client
Supervision Requirements
Broker-dealers must supervise variable product sales.
Supervisory Responsibilities
| Responsibility | Description |
|---|---|
| Review of recommendations | Supervisor must approve suitability |
| Training | Ensure representatives understand products |
| Compliance monitoring | Ongoing review of sales practices |
| Documentation review | Verify proper records maintained |
Consequences of Unsuitable Sales
Selling unsuitable variable products can result in:
| Consequence | Description |
|---|---|
| Customer complaints | Unhappy clients may file complaints |
| FINRA enforcement | Fines, suspensions, or bars |
| License revocation | Loss of securities and/or insurance licenses |
| Civil liability | Lawsuits for damages |
| Rescission | Policy may be canceled and premiums returned |
Key Takeaways
- Variable product sales require both insurance and securities licenses
- FINRA Rule 2111 requires suitability analysis before recommendations
- Must gather comprehensive customer investment profile information
- Risk tolerance must be assessed and documented
- Prospectus must be delivered before or at time of sale
- All suitability analyses must be documented
- Replacements require additional analysis and justification
- Unsuitable sales can result in serious regulatory and legal consequences
To sell variable life insurance, an agent must hold:
FINRA suitability rules require that before recommending a variable product, the representative must:
Which of the following is NOT typically part of a customer's investment profile for suitability purposes?
When must a prospectus be delivered for a variable life insurance sale?