Key Takeaways
- Applications require owner/annuitant/beneficiary info and suitability data.
- Principal approval is required before submission under Rule 2330.
- Free look periods are typically 10-30 days.
- Most contracts allow 10% annual free withdrawals; excess is subject to surrender charges.
- 1035 exchanges must be direct transfers with the same owner and annuitant.
- Annuitization is generally irrevocable once payments begin.
Variable Annuity Transactions
Variable annuity transactions involve insurance company processes in addition to securities regulations. Understanding purchase applications, withdrawals, surrenders, and exchanges is important for Series 6 success.
Initial Purchase Process
Application Requirements
Variable annuity applications typically require:
| Information | Purpose |
|---|---|
| Owner information | Name, address, SSN, date of birth |
| Annuitant information | Person whose life determines payouts |
| Beneficiary designation | Who receives death benefit |
| Premium amount | Initial investment |
| Subaccount allocation | Investment selections |
| Rider elections | Optional benefits (GMIB, GMWB, etc.) |
| Suitability information | Financial situation, objectives, risk tolerance |
Principal Review (FINRA Rule 2330)
Before the application is transmitted to the insurance company:
- Registered principal must review and approve
- Must verify suitability documentation
- No later than 7 business days after OSJ receives complete application
Free Look Period
After receiving the contract, owners have a free look period:
- Typically 10 to 30 days depending on state
- Can cancel for full refund of premiums
- No surrender charges apply
- Allows time to review contract terms
Additional Premium Payments
Flexible premium annuities allow additional investments:
- Subject to minimum amounts (often $50-$250)
- May be set up as systematic investments
- Allocated according to current instructions
- No new free look period
Withdrawals and Partial Surrenders
Free Withdrawal Provision
Most contracts allow 10% annually without surrender charges:
- Based on account value or premiums paid
- May or may not be cumulative
- Withdrawals beyond free amount subject to surrender charges
Withdrawal Process
| Step | Description |
|---|---|
| 1 | Customer requests withdrawal |
| 2 | Firm verifies request authenticity |
| 3 | Calculate amount (including surrender charge if applicable) |
| 4 | Process 10% penalty if under age 59½ |
| 5 | Withhold taxes if requested/required |
| 6 | Send proceeds to customer |
Tax Withholding
| Situation | Withholding |
|---|---|
| Non-qualified annuity | Optional (customer can elect) |
| Qualified annuity (IRA, etc.) | 10% federal unless waived |
| Under age 59½ | Subject to 10% IRS penalty on taxable amount |
Full Surrender
Surrendering the entire contract:
- Receives cash surrender value
- Cash value minus any applicable surrender charges
- Minus any outstanding policy loans
- Taxable on earnings (LIFO)
- 10% penalty if under 59½
Surrender Charge Calculation Example
| Contract Details | Amount |
|---|---|
| Account value | $150,000 |
| Premiums paid | $100,000 |
| Surrender charge (Year 3 = 5%) | $7,500 |
| Cash surrender value | $142,500 |
Tax calculation:
- Taxable earnings: $42,500 ($142,500 - $100,000)
- Plus 10% penalty if under 59½: $4,250
1035 Exchanges
Process Overview
A 1035 exchange transfers from one annuity to another tax-free:
| Step | Timeline |
|---|---|
| 1. Complete new application | Day 1 |
| 2. Complete 1035 exchange form | Day 1 |
| 3. Submit to new carrier | Day 1-3 |
| 4. New carrier requests funds from old carrier | Week 1-2 |
| 5. Old carrier processes and transfers | Week 2-4 |
| 6. New contract funded | Week 2-6 |
Typical timeline: 2-6 weeks depending on carriers involved
1035 Requirements
For tax-free treatment:
- Same owner - Must be the same contract owner
- Same annuitant - Must be the same person
- Direct transfer - Funds must go directly between carriers
- No constructive receipt - Owner cannot receive funds personally
1035 Suitability Considerations
Before recommending a 1035 exchange, consider:
| Factor | Question to Ask |
|---|---|
| Surrender charges | Is the old contract still in surrender period? |
| Benefits lost | What guarantees or step-ups will be forfeited? |
| New surrender period | Will this reset the clock? |
| Fee comparison | Are fees comparable or lower? |
| Customer benefit | Is there a documented benefit for the customer? |
Annuitization
Election Process
When electing to annuitize:
- Select payout option (life only, period certain, joint, etc.)
- Determine start date
- Complete annuitization election form
- Irrevocable once payments begin
Timing Considerations
| Factor | Impact |
|---|---|
| Age | Older = higher payments (shorter life expectancy) |
| Payout option | Life only = highest; joint = lowest |
| AIR selection | Higher AIR = higher initial payment but payments may decrease |
Death Benefit Claims
During Accumulation Phase
When the annuitant dies before annuitization:
| Step | Description |
|---|---|
| 1 | Beneficiary notifies insurance company |
| 2 | Submit death certificate |
| 3 | Complete claim forms |
| 4 | Insurance company calculates death benefit |
| 5 | Beneficiary elects distribution option |
Death Benefit Distribution Options
| Option | Description |
|---|---|
| Lump sum | Receive full amount immediately |
| 5-year rule | Distribute entirely within 5 years |
| Life annuity | Based on beneficiary's life expectancy |
Spousal Continuation
Surviving spouse may have option to:
- Continue the contract as new owner
- Maintain tax-deferred status
- Delay distribution requirements
Key Exam Points
- Principal approval - Required before submitting VA application
- Free look - 10-30 days to cancel with full refund
- 10% free withdrawal - Typically allowed annually
- 1035 exchange - 2-6 weeks, direct transfer required
- Surrender charges - Deducted from account value
- Annuitization irrevocable - Cannot be undone once started
- Death benefit - Beneficiary options include lump sum, 5-year, or annuity
A customer purchased a variable annuity 3 years ago and wants to make a withdrawal. The contract has a 10% free withdrawal provision and a 5% surrender charge in year 3. If they withdraw 15% of their account value, what portion is subject to the surrender charge?
In a 1035 exchange from one variable annuity to another, which of the following is required for the exchange to be tax-free?
What is the typical free look period for a newly purchased variable annuity?