9.5 Regulation of Variable Insurance Products

Testable Facts Regarding Sales Charges & Refunds

- maximum sales charge over the life of the contract is 9% - a policyowner who wants a refund within 45 days receives all money paid - from 45 days to two years, there is a partial refund of sales charge - after a variable life policy has been in effect for two years, the surrender value of the policy is the cash value; there is no sales charge refund

Negative Conditions of 1035 Exchanges

- surrender charges imposed by insurance company - the beginning of a new surrender period - possible reduction in death benefit - how the expenses of the new contract compare with those of the old contract - the benefits included in the new contract may not be needed by the purchaser

Testable Facts Regarding Variable Life Insurance Exchange

- the contract exchange provision must be available for a minimum of two years - no medical underwriting (evidence of insurability) is required for the exchange - the new policy is issued as if everything were retroactive; the age of the insured as of the original date is the age used for permium calculations for the new policy

Suitability of Variable Life Insurance

-there must be a life insurance need -the applicant must be comfortable with the separate account and the fact that the cash value is not guaranteed -the applicant must understand the variable death benefit feature

Key Difference b/t rules for funds and variable annuities

FINRA rule 2320 does not place a maximum sales charge on variable anuities FINRA rule 2341 has a maximum load on mutual funds of 8.5% of the offering price

Specific Suitability Requirements

Reasonable Basis to Believe: - customer has been informed of various features of deferred variable annuities, such as the potential surrender period and surrender charge, which may include * potential tax penalty - if withdrawal occurs before 59 1/2 * mortality & expense fees * investment advisory fees * potential charges for and features of riders * the insurance & investment components of deferred variable annuities * market risk - the customer would benefit from certain features such as tax-deferred growth, annuitization, or a death or living benefit - annuity as a whole is suitable

Policy Loans

loans made by an insurance company to its policyholders using their policies as collateral - usually a percentage of the cash value minimum percentage that must be made available is 75% after the policy has been in force for three years, but the insurer is never required to loan 100% - that is obtained through surrender if death benefit becomes payable during any period that a loan is outstanding, the loan amount is deducted from the death benefit before payment & same with cash value if surrendered early interest rate charged is stated in the policy

36-Month Rule

must put reasonable effort into determining if the customer has had another deferred variable annuity exchange within the preceding 36 months asking the customer is considered reasonable - but it must be fully documented

FINRA Rule 2330 - Member's Responsibilities Regarding Deferred Variable Annuities

no member or person associated with a member shall recommend to any customer the purchase or exchange of a deferred variable annuity unless the member or person associated with a member has a reasonable basis to believe that it is suitable ex of egregious behavior: recommending a client take out a HELOC and use the proceeds to fund the purchase of a deferred variable annuity