Quick Answer
Fixed insurance and annuity products, commodities, collectibles, precious metals, direct real estate, currency, and bank CDs are not securities. The common thread: someone other than the investor (an insurer, or no one at all) bears the investment risk, or the asset is tangible property rather than pooled capital seeking a return.
Knowing what IS a security is only half the battle. The exam also tests your ability to identify instruments that fall outside the Uniform Securities Act's (USA) definition.
Which Insurance Products Are Excluded?
The USA explicitly excludes certain insurance products from the definition of "security":
| NOT a Security | Reason |
|---|---|
| Fixed annuities | Insurance company promises to pay a fixed sum; investment risk is borne by the insurer |
| Whole life insurance | Guaranteed cash value; no market risk to the policyholder |
| Term life insurance | Pure insurance; no investment component at all |
| Endowment policies | Insurance product with a guaranteed payout at maturity |
| Disability insurance | Insurance product, not an investment |
The key distinction: Who bears the investment risk?
- Insurer bears the risk → NOT a security (fixed annuity, whole life, term life, endowment)
- Policyholder bears the risk → IS a security (variable annuity, variable life)
Why Does "Variable" vs. "Fixed" Matter?
This is one of the most reliable shortcuts for the exam, but the name is a clue, not the rule; the controlling fact is always who bears the investment risk:
| Product Type | Security? | Who Bears Investment Risk? |
|---|---|---|
| Variable annuity | Yes | Policyholder |
| Variable life insurance | Yes | Policyholder |
| Fixed annuity | No | Insurance company |
| Whole life insurance | No | Insurance company |
| Term life insurance | No | Insurance company |
| Endowment policy | No | Insurance company |
Exam Tip: Gotchas
- A variable annuity IS a security; a fixed annuity is NOT. The USA explicitly excludes annuity contracts under which an insurance company promises to pay a fixed sum. Variable annuities do not promise a fixed sum; the payout depends on the performance of underlying investments. This is one of the most commonly tested distinctions.
Which Tangible Assets and Commodities Are Excluded?
These are NOT securities because they do not meet the USA definition and generally fail the Howey Test:
| NOT a Security | Reason |
|---|---|
| Commodities and commodity futures | Regulated under the Commodity Exchange Act, not the USA |
| Collectibles (art, coins, stamps, antiques) | Tangible personal property, not investment contracts |
| Precious metals (physical gold, silver) | Tangible commodities |
| Real estate (direct ownership) | Tangible property |
| Currency (physical foreign exchange) | Medium of exchange, not a security |
Important exceptions: the underlying asset is not a security, but a fund or pooled interest in it IS:
- Physical gold is NOT a security, but a gold ETF IS a security
- Direct real estate ownership is NOT a security, but a REIT or real estate limited partnership IS a security
- The Howey Test applies: if investors pool money and rely on a manager to generate profits, the interest is an investment contract
Exam Tip: Gotchas
- Real estate itself is NOT a security, but an interest in a REIT or a real estate limited partnership IS a security. This distinction is frequently tested.
- Physical gold is NOT a security. A gold ETF IS a security. The distinction is direct ownership vs. pooled investment.
Which Banking Products Are Excluded?
| NOT a Security | Reason |
|---|---|
| Bank certificates of deposit (traditional CDs) | Banking product insured by FDIC |
| Fixed-rate bank deposits | Banking product, not an investment |
Key distinction: A traditional bank CD is NOT a security. But a certificate of deposit for a security (a receipt for a deposited security) IS a security. The names sound similar but are entirely different instruments.
Exam Tip: Gotchas
- A bank certificate of deposit (CD) is NOT a security, but a certificate of deposit for a security (a receipt for a deposited security) IS a security. The names sound similar but are entirely different instruments.
What Should You Check on Exam Day?
- Ask who bears the investment risk before classifying an insurance or annuity product.
- Do not classify the underlying tangible asset (gold, real estate) the same way as the pooled vehicle that holds it (a gold ETF, a REIT).
- Watch for a bank CD dressed up to look like a "certificate of deposit for a security."