5.3 Variable Annuity Special Requirements
Key Takeaways
- Variable annuities are both insurance contracts and securities, so producers need a Michigan life insurance license AND a FINRA registration (Series 6 or Series 7).
- Sales must satisfy both Michigan's best interest suitability law and FINRA's Regulation Best Interest (Reg BI), effective June 30, 2020.
- An SEC prospectus must be delivered at or before the sale, and producers must disclose that separate-account values can fall.
- Separate-account assets sit outside the insurer's general account and are not protected by the Michigan guaranty association.
- Living-benefit riders (GMIB, GMWB, GLWB, GMAB) carry extra annual cost and must be fully explained.
A Product With Two Regulators
A variable annuity invests premiums in separate-account subaccounts (mutual-fund-like portfolios) chosen by the contract owner. Because the owner bears the investment risk, federal law treats the contract as a security, while the insurance guarantees keep it an insurance product. The result is dual regulation: the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) oversee the securities side, and the Michigan Department of Insurance and Financial Services (DIFS) oversees the insurance side.
Dual Licensing
To sell a variable annuity in Michigan, a producer must hold every credential below — missing any one makes the sale unlawful.
| Credential | Authority | Covers |
|---|---|---|
| Life insurance license (with variable line authority) | Michigan DIFS | The insurance contract |
| Series 6 or Series 7 registration | FINRA | The securities (separate account) |
| Series 63 (where required) | FINRA / state | State securities (blue-sky) agent registration |
| Insurer appointment | Insurance company | Authority to represent the carrier |
| Broker-dealer affiliation | Securities firm | Supervision of securities sales |
Exam trap: A life license alone is never enough for a variable annuity. Series 6 covers packaged products (mutual funds, variable contracts); Series 7 is the broader general-securities registration. Either one satisfies the variable-annuity securities requirement.
Two Standards of Conduct
Variable annuity recommendations must clear both regimes at once.
| Standard | Source | Core Duty |
|---|---|---|
| Michigan best interest | MCL 500.4151 et seq. | Care, Disclosure, Conflict-of-Interest, Documentation |
| Regulation Best Interest (Reg BI) | SEC, effective June 30, 2020 | Disclosure, Care, Conflict-of-Interest, Compliance obligations |
When the two overlap, the producer must meet the stricter requirement on each point.
Prospectus Delivery and Risk Disclosure
Unlike a fixed annuity, a variable annuity requires a statutory prospectus, the SEC document describing the contract and every subaccount.
| Timing | Requirement |
|---|---|
| At or before the sale | Full prospectus delivered to the buyer |
| Ongoing | Updated/summary prospectus and shareholder reports each year |
| New investment options | Prospectus for any added subaccount |
The prospectus must spell out investment objectives, all fees and expenses, risk factors, death-benefit provisions, surrender charges, and any performance history. Producers must clearly state that account values can decline with market performance, that past performance does not guarantee future results, and that guarantees depend on the insurer's claims-paying ability.
Guaranty Association Gap
A critical and heavily tested distinction: separate-account assets are not part of the insurer's general account and are NOT covered by the Michigan Life and Health Insurance Guaranty Association. If the insurer fails, the subaccount investments belong to the contract owner but carry market risk; only general-account guarantees (such as a fixed-account option or certain death-benefit guarantees) fall under guaranty-association coverage.
Fee Layers
Variable annuities stack costs, which a producer must disclose and a buyer must understand.
- Mortality & Expense (M&E) charge — commonly around 1.0%–1.5% of separate-account value per year
- Administrative / contract fee — flat dollar amount or percentage
- Subaccount expense ratios — fund-level management fees
- Surrender charges — declining schedule, often 7 years
- Rider charges — added cost for each living or enhanced death benefit
Living-Benefit Riders
Variable annuities are frequently sold with optional riders that guarantee income or value despite market losses, each adding annual cost.
| Rider | Plain-Language Guarantee |
|---|---|
| GMIB (Guaranteed Minimum Income Benefit) | A minimum future annuitization income |
| GMWB / GLWB (Withdrawal / Lifetime Withdrawal Benefit) | A guaranteed yearly withdrawal, GLWB for life |
| GMAB (Guaranteed Minimum Accumulation Benefit) | A minimum account value after a set period |
Worked example: A contract with a 1.30% M&E charge, a 0.95% average subaccount expense, and a 1.05% GLWB rider has total annual drag of about 3.30%. The owner's subaccounts must earn more than 3.30% just to break even before any market gain. The producer must disclose this so the buyer is not misled by gross hypothetical returns.
Annuitization and the Two Phases
Like all deferred annuities, a variable annuity has an accumulation phase (subaccount values rise and fall with the market) and a payout/annuitization phase. At annuitization the owner chooses a settlement option — life only, life with period certain, or joint and survivor — and may select fixed annuity units (a level dollar payment) or variable annuity units (payments that fluctuate with an assumed investment rate). The producer must explain that choosing variable payout continues to expose income to market risk, while fixed payout trades upside for a predictable check.
This trade-off is a common exam point because buyers often assume an annuity always means a guaranteed flat income.
Supervision and Suitability Files
Because a broker-dealer supervises the securities side, every variable annuity recommendation is subject to a principal review. The producer's customer-specific file must support both the insurance best interest determination and the Reg BI care obligation: the customer's investment profile, risk tolerance, time horizon, liquidity needs, and the reason this contract and these subaccounts were selected over lower-cost alternatives. A bare assertion that the product is "suitable" is insufficient — the file must show the comparison that was made.
Common Variable Annuity Traps
- Telling a client the contract is "guaranteed" without clarifying that only certain general-account or rider guarantees apply, not the separate-account value.
- Recommending a variable annuity inside an IRA solely for tax deferral (duplicate deferral, as in 5.1).
- Switching a client from one variable annuity to another to generate a new commission while restarting surrender charges — a securities and insurance violation.
- Failing to deliver the prospectus at or before the sale.
Exam tip: "Suitability" for a variable annuity means both the insurance recommendation and the securities transaction must fit the customer — under Michigan's best interest law and Reg BI simultaneously.
Which combination of credentials is required to sell a variable annuity in Michigan?
How are the separate-account (subaccount) assets of a variable annuity treated if the issuing insurer becomes insolvent?
A variable annuity carries a 1.30% M&E charge, 0.95% average subaccount expense, and a 1.05% living-benefit rider. Approximately what gross return must the subaccounts earn just to break even before any net gain?