DC Variable Products in Insurance 1 — Questions and Answers
Question 1: What licenses are required to sell variable annuities in DC?
- Only a DC life insurance license
- Only a FINRA Series 6 or Series 7 securities registration
- Both a DC life insurance producer license and a FINRA Series 6 (or equivalent) securities registration (Correct answer)
- A DC property and casualty license and a Series 63
Correct answer: Both a DC life insurance producer license and a FINRA Series 6 (or equivalent) securities registration
Variable annuities are insurance-securities hybrids requiring both a DC life insurance producer license and a FINRA securities registration (Series 6 or 7).
Because variable annuities invest premiums in securities (separate account subaccounts), they are regulated as both insurance products (by DISB) and securities (by FINRA/SEC). Producers must hold a DC life license and pass the FINRA Series 6 (investment company products) or Series 7 (general securities) exam.
Question 2: In a variable annuity, the investment risk is borne by whom?
- The insurance company through the general account
- The policyholder through separate account subaccounts (Correct answer)
- The state guaranty association
- FINRA as the securities regulator
Correct answer: The policyholder through separate account subaccounts
Variable annuity values fluctuate based on the performance of the policyholder's chosen subaccounts—the policyholder bears the investment risk.
Variable annuity premiums are allocated to separate account subaccounts (mutual fund-like investments). The policyholder chooses the subaccounts and bears the market risk—values can increase or decrease. This distinguishes variable products from fixed annuities, where the insurer bears the investment risk.
Question 3: What is the primary purpose of the 'separate account' in a variable life insurance policy?
- To hold premium reserves for the insurer's general obligations
- To hold and invest the policyholder's premium in market-based subaccounts, insulated from the insurer's general liabilities (Correct answer)
- To fund the insurer's reinsurance obligations
- To maintain the DC Insurance Guaranty Association's reserve fund
Correct answer: To hold and invest the policyholder's premium in market-based subaccounts, insulated from the insurer's general liabilities
The separate account holds the variable policy's invested assets, legally segregated from the insurer's general account so that other creditors cannot reach the policyholder's funds.
Variable product separate accounts are legally ring-fenced from the insurer's general account. This means if the insurer faces financial difficulties, the assets in the separate account (belonging to variable policyholders) are protected from the insurer's general creditors. State insurance law and SEC regulations govern these accounts.
Question 4: Under FINRA rules applicable to DC producers, what is the 'suitability' standard for variable annuity sales?
- The product must be the cheapest available option
- The product must be reasonably suitable based on the customer's financial situation, needs, investment objectives, and risk tolerance (Correct answer)
- Only customers with investment experience may purchase variable annuities
- Variable annuities are suitable for any customer who signs a waiver
Correct answer: The product must be reasonably suitable based on the customer's financial situation, needs, investment objectives, and risk tolerance
FINRA's suitability rule requires producers to have a reasonable basis to believe the variable annuity is suitable for the specific customer based on their financial profile.
Under FINRA Rule 2330, variable annuity recommendations must be suitable—based on the customer's age, investment time horizon, existing assets, liquidity needs, and risk tolerance. Producers in DC must gather customer information and document the suitability analysis before recommending variable products.
Question 5: A DC client purchases a variable universal life (VUL) policy. Which feature distinguishes VUL from whole life insurance?
- VUL provides no death benefit—it is purely an investment
- VUL allows the policyholder to allocate cash value to investment subaccounts with market-linked returns and flexible premiums (Correct answer)
- VUL premiums are fixed and guaranteed never to increase
- VUL policies are not regulated by DC insurance law
Correct answer: VUL allows the policyholder to allocate cash value to investment subaccounts with market-linked returns and flexible premiums
VUL combines the permanent death benefit of whole life with investment flexibility—policyholders can invest cash value in subaccounts and vary premium payments within limits.
Variable universal life (VUL) offers flexible premium payments (within IRS limits), a permanent death benefit, and the ability to allocate cash value to investment subaccounts with market-linked returns. Unlike whole life (fixed premiums, guaranteed cash value), VUL's cash value fluctuates based on subaccount performance.
Question 6: What is a 'prospectus' and when must it be delivered in a DC variable annuity sale?
- A premium payment schedule delivered after the annuity is issued
- A legally required disclosure document describing the investment options, fees, and risks that must be delivered before or at the time of sale (Correct answer)
- A post-sale report sent annually by the insurer
- An agent's personal analysis of the investment options
Correct answer: A legally required disclosure document describing the investment options, fees, and risks that must be delivered before or at the time of sale
A prospectus is an SEC-required disclosure document for variable annuities that must be delivered before or at the time of sale, detailing all material information about the product.
Because variable annuities are registered securities products, they require an SEC-filed prospectus. The prospectus covers investment objectives, risks, fees, expenses, and tax treatment. In DC, producers must deliver the current prospectus to the client before or at the time of the sale—not after the contract is issued.
DC Variable Products in Insurance 1
What licenses are required to sell variable annuities in DC?