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?
6.3 Trade Confirmations
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