Variable Life Insurance and Variable Annuity Communications

Variable life insurance and variable annuity contracts are packaged products combining insurance features with securities. FINRA Rule 2211 imposes disclosure standards on top of Rule 2210, and Rule 2330 adds a 7-business-day principal review clock for recommended purchases and exchanges.

What does FINRA Rule 2211 require for variable product communications?

Rule 2211 supplements Rule 2210 for retail communications and correspondence about variable life insurance and variable annuities.

Product identification requirement:

• Must clearly describe the product as:
  • A variable life insurance policy, OR
  • A variable annuity (as applicable)
• A firm may use a proprietary product name in addition to the generic description
• If the proprietary name already describes the product type (e.g., "Preferred Variable Annuity"), a separate generic description is not required

Prohibited representations:

Communications must NOT imply that variable life or variable annuities are:

• Short-term or highly liquid investments (because of substantial surrender charges and the 10% IRS penalty on withdrawals before age 59 1/2)
• Mutual funds (they are insurance contracts that invest in sub-accounts, not the same as mutual funds)
• Retirement plans (a contract can be held inside a retirement plan, but the contract itself is not a plan)
• Obligations to pay premiums that do not actually exist

Balanced liquidity discussion:

• Any mention of liquidity or ease of access must be balanced with clear language about:
  • Surrender charges
  • Tax penalties (10% IRS penalty before 59 1/2)
  • The long-term nature of the product
  • The fact that the investor may receive less than the original amount invested

Variable life specific:

• Discussions of policy loans and withdrawals must explain their impact on cash values and death benefits

How must insurance guarantees be described in variable product communications?

Variable contracts contain insurance-related guarantees (minimum death benefits, living benefits like Guaranteed Minimum Income Benefit (GMIB) and Guaranteed Minimum Withdrawal Benefit (GMWB), minimum interest rates on the general account). Communications must handle these guarantees carefully.

A compliant retail communication must:

• NOT overemphasize or exaggerate the safety of any guarantee
• Disclose that guarantees depend on the claims-paying ability of the issuing insurance company
• NOT imply that a guarantee applies to the investment return or principal value of the separate account
• NOT represent that the insurance company's financial rating applies to the separate account

Exam Tip: Gotchas

Variable annuity guarantees (living benefits, death benefits, GMIB, GMWB) back the insurance company's obligation, not the separate account's performance. A Rule 2211 communication that says "guaranteed returns" without the claims-paying ability caveat is a violation.

When can a variable product communication use subaccount performance predating its inclusion?

A retail communication may include a subaccount's historical performance that predates its inclusion in the policy or annuity, provided:

• No significant changes occurred to the underlying fund at or after the time it became part of the variable product
• The performance is presented using standardized methodology consistent with Rule 482

Why must variable products be described as tax-deferred and not tax-free?

This point bears repeating in the variable products context:

• Variable annuities and variable life insurance are tax-deferred, NOT tax-free
• Growth inside the contract is not currently taxed, but withdrawals are taxed as ordinary income (plus the 10% early-withdrawal penalty before age 59 1/2)
• Municipal bond interest is federally tax-exempt; a variable product is never tax-exempt, and the two should never be confused in a communication

Exam Tip: Gotchas

Calling a variable annuity "tax-free" is a violation of Rules 2210 and 2211 AND a potential SA Section 12 antifraud violation. The exam routinely tests this exact word swap.

What does FINRA Rule 2330 require for deferred variable annuity principal review?

Rule 2330 governs the recommendation and supervision of deferred variable annuity purchases and exchanges. It is listed under Function 1.1 because it ties into the communication and review framework.

The 7-business-day clock:

• Before transmitting a deferred variable annuity application to the insurance company, a registered principal must review and approve the recommended purchase or exchange
• The approval must occur within 7 business days of the Office of Supervisory Jurisdiction (OSJ) receiving a complete and correct application package
• The clock starts when the OSJ receives the complete package, NOT when the customer signs the application
• If the application is incomplete, the 7-day clock does not start
• The principal's approval must be documented and signed

Suitability basis for approval:

The principal must determine there is a reasonable basis to believe the transaction is suitable for the customer, considering:

• Customer age, financial situation, tax status, and investment objectives
• Product features: surrender period, riders, charges, fund options
• Whether the customer has had another deferred variable annuity exchange within the preceding 36 months

Exam Tip: Gotchas

The Rule 2330 principal review clock is 7 business days from OSJ receipt of a complete and correct application, NOT from the customer signing the application. An incomplete application does not start the clock. The exam will test this specific trigger.