5.3 Variable Annuity Special Requirements
Key Takeaways
- Variable annuities are securities and require FINRA registration in addition to insurance license
- Illinois requires both insurance suitability and securities suitability analysis
- Producers must disclose that variable annuity values can decrease
- Prospectus must be delivered before or at the time of sale
- Living benefit riders require additional disclosure and explanation
Variable annuities are unique products that combine insurance features with securities investment. Illinois imposes special requirements for their sale.
Dual Licensing Requirement
To sell variable annuities in Illinois, a producer must hold:
| License Type | Issuing Authority |
|---|---|
| Life Insurance License | Illinois DOI |
| Series 6 or Series 7 | FINRA |
| Insurer Appointment | Insurance company |
| Broker-Dealer Affiliation | Securities firm |
Why Both Licenses?
- Variable annuities are insurance contracts (DOI)
- Separate accounts are securities (FINRA/SEC)
- Both sets of regulations apply
Securities Suitability
In addition to Illinois insurance suitability, variable annuity sales must meet FINRA suitability requirements:
FINRA Suitability Obligations
| Obligation | Requirement |
|---|---|
| Reasonable Basis | Product is suitable for some investors |
| Customer-Specific | Product suits this specific customer |
| Quantitative | Frequency of transactions is appropriate |
Risk Disclosure
Producers must disclose that:
- Account values can decrease due to market performance
- Past performance does not guarantee future results
- Guarantees are subject to insurer's claims-paying ability
- Fees reduce investment returns
Exam Tip: Variable annuity values CAN go down. This must be clearly disclosed to the client.
Prospectus Delivery
Variable annuities require prospectus delivery:
Timing Requirements
| When | Requirement |
|---|---|
| Before/At Sale | Full prospectus must be delivered |
| After Sale | Annual updates sent to contract holders |
| Fund Changes | Prospectus for new subaccounts |
Prospectus Contents
The prospectus must include:
- Investment objectives of subaccounts
- All fees and expenses
- Risk factors
- Death benefit provisions
- Surrender charges
- Historical performance (if any)
Living Benefit Riders
Many variable annuities offer living benefit riders that require additional disclosure:
Common Living Benefits
| Rider Type | What It Provides |
|---|---|
| GMIB | Guaranteed Minimum Income Benefit |
| GMWB | Guaranteed Minimum Withdrawal Benefit |
| GMAB | Guaranteed Minimum Accumulation Benefit |
Disclosure Requirements
Producers must explain:
- Additional cost of the rider
- How the guarantee works
- Limitations and restrictions
- When benefits can be exercised
- Impact on other contract features
Illinois Insurance Suitability Plus Securities
For variable annuity sales, producers must satisfy:
- Illinois best interest standard (Regulation-like requirements)
- FINRA suitability requirements
- SEC prospectus delivery rules
- Broker-dealer supervision requirements
What licenses are required to sell variable annuities in Illinois?
When must a prospectus be delivered for a variable annuity sale?
What must producers disclose about variable annuity account values?
What is a GMWB rider on a variable annuity?