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2.4 Variable Annuities and Variable Life Insurance: Structure, Charges, and Rule 2320
Investment Company and Variable Contracts Products Principal Series 26
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1 Chapter 1: Registration of the Broker-Dealer and Its Associated Persons
1.1 Broker-Dealer Registration, FINRA Membership, and Firm Filings 1.2 Individual Registration: Forms U4 and U5, Registration Categories, and Exempt Persons 1.3 Pre-Hire Screening, Fingerprinting, and Statutory Disqualification 1.4 Heightened Supervision, Interim Plans, and the Taping Rule 1.5 Broker-Dealers, Investment Advisers, Dual Registrants, and Unregistered Entities
2 Chapter 2: Training, Continuing Education, and Product Knowledge
2.1 Continuing Education (Rule 1240), the Maintaining Qualifications Program, and the Annual Compliance Meeting 2.2 The Investment Company Act of 1940: Classifications, Registration, and Fund Governance 2.3 Mutual Fund Pricing, Redemption, Exchanges, Sales Charges, and Share Classes 2.4 Variable Annuities and Variable Life Insurance: Structure, Charges, and Rule 2320 2.5 Closed-End and Interval Funds, UITs, Money Market Funds, 529 Plans, and Investment Risks
3 Chapter 3: Supervisory System, Conduct Standards, Insider Trading, and Discipline
3.1 The Supervisory System, Written Supervisory Procedures, and Standards of Conduct 3.2 Insider Trading, Information Barriers, and Personal Trading Supervision 3.3 FINRA Investigations, Disciplinary Proceedings, Sanctions, and Exemptions
4 Chapter 4: Communications with the Public
4.1 Communications Categories, Principal Approval, Filing, and Recordkeeping (Rule 2210) 4.2 Content Standards, Investment Company Advertising, and Professional Designations 4.3 Variable Contract Communications, Fund Rankings, Bond Fund Volatility Ratings, and Investment Analysis Tools 4.4 Correspondence and Internal Communications, Social Media, Public Appearances, and Telemarketing
5 Chapter 5: Recommendations, Customer Accounts, and Product Sales Supervision
5.1 Regulation Best Interest, Conflicts, and Form CRS 5.2 Know Your Customer, FINRA Suitability, and Institutional Accounts 5.3 New Accounts, Customer Authority, Discretion, and Order Handling 5.4 Mutual Fund Breakpoints, Share Classes, and Switching Supervision 5.5 Deferred Variable Annuities and the Seven-Business-Day Principal Review 5.6 Prospectuses, Summary Prospectuses, SAIs, and Ongoing Disclosures
6 Chapter 6: Compensation, Outside Activities, and Personal Conduct
6.1 Cash Compensation, Distribution Arrangements, and Conflicts 6.2 Gifts, Gratuities, and Business Entertainment (Rule 3220) 6.3 Training Meetings, Sales Contests, and Non-Cash Compensation 6.4 Referral Payments, Bank Networking, and Unregistered Persons 6.5 Outside Business Activities, Private Securities Transactions, and Rule 3290 Transition 6.6 Outside Accounts, Borrowing and Lending, Account Sharing, and Guarantees
7 Chapter 7: Customer Account Operations, Transfers, and Privacy
7.1 Account Records, Trusted Contacts, Confirmations, and Statements 7.2 Cash Accounts, T+1 Settlement, Regulation T, Extensions, and Freeriding 7.3 ACATS Transfers, Transfer-on-Death Accounts, and Account Changes 7.4 Regulation S-P, Incident Response, Service Providers, and Identity Theft
8 Chapter 8: Anti-Money Laundering, Customer Identification, and Sanctions
8.1 AML Program, Independent Testing, Training, and Governance 8.2 Customer Identification, Due Diligence, and Beneficial Ownership 8.3 SARs, CTRs, OFAC, Information Sharing, and AML Red Flags
9 Chapter 9: Supervisory Controls, Business Continuity, and Regulatory Reporting
9.1 Supervisory Controls, Annual Testing, and CEO Certification 9.2 Business Continuity, Systems Resilience, Cybersecurity, and Vendors 9.3 Rule 4530, FOCUS and Annual Reports, and Customer-Asset Events
10 Chapter 10: Office Classifications, Inspections, and Records
10.1 OSJs, Branches, RSLs, and Inspection Cycles 10.2 Inspection Reports, Independent Review, Signage, and Office Files 10.3 Broker-Dealer Books and Records, Electronic Storage, and Correspondence
11 Chapter 11: Complaints, Arbitration, Mediation, and Expungement
11.1 Customer Complaints, Investigation, Retention, and Reporting 11.2 Predispute Agreements, Arbitration Codes, Eligibility, Panels, and Awards 11.3 Mediation and Customer-Dispute Expungement
12 Chapter 12: Financial Responsibility, Membership Changes, and Investor Protection
12.1 Net Capital, Minimum Tiers, Haircuts, and Early Warning 12.2 Customer Protection, Possession or Control, Reserve Formula, and Exemptions 12.3 New-Product Review and Continuing Membership Applications 12.4 SIPC, Fidelity Bonds, Proxy Materials, and Financial Reports
2.4 Variable Annuities and Variable Life Insurance: Structure, Charges, and Rule 2320
Key Takeaways Explain This Topic AI
A variable contract's subaccounts are held in an insurance company separate account registered under the 1940 Act, usually as a unit investment trust that invests in underlying fund portfolios.
During annuitization, the first payment depends on the assumed interest rate (AIR); later payments rise when subaccount returns exceed the AIR and fall when they lag it.
Rule 22d-2 lets variable annuity sales loads and charges vary if the variations are disclosed in the prospectus, reflect cost differences and are not unfairly discriminatory, and Rule 22e-1 suspends redemption rights once payments are based on life contingencies.
Rule 2320 requires members to transmit variable contract applications and payments promptly, and selling agreements must return the commission if a contract is redeemed within seven business days after acceptance.
Annuity earnings are taxed as ordinary income when withdrawn, withdrawals before age 59 1/2 generally add a 10% federal penalty, and Section 1035 allows tax-free exchanges of annuity for annuity or life insurance for annuity, but not annuity for life insurance.
Last updated: September 2026
Why Variable Contracts Are Securities
A variable annuity (VA) or variable life insurance (VLI) policy is issued by an insurance company, but the contract owner bears the investment risk of the subaccounts chosen. Because of that risk, the contracts are securities. They must be registered under the Securities Act of 1933 and sold with a prospectus, and the separate account holding the subaccounts must register under the Investment Company Act. VA separate accounts register on Form N-4 and VLI separate accounts on Form N-6 . Most are organized as unit investment trusts investing in underlying fund portfolios, although a separate account can also be registered as an open-end management company.
The separate account's assets are kept apart from the insurer's general account , so subaccount values reflect investment performance. Any guarantees , such as a guaranteed death benefit, a fixed account or a living benefit rider, are backed by the insurer's general account and claims-paying ability . That is why FINRA Rule 2211 forbids communications implying that a guarantee covers the separate account's investment return (Section 4.3).
Variable Annuity Phases
Accumulation phase. Purchase payments buy accumulation units in the chosen subaccounts. The value of each unit moves with the underlying portfolio, net of charges. Earnings grow tax-deferred until withdrawn.
Annuity (payout) phase. At annuitization, the accumulated value is converted into annuity units . The first payment is set using the owner's age, the payout option and the assumed interest rate (AIR) . After that:
- if the subaccounts earn more than the AIR, payments increase ;
- if they earn less than the AIR, payments decrease ; and
if they earn exactly the AIR, payments stay level.
Common payout options include life only (the highest payment, with nothing for heirs), life with period certain , joint and last survivor , and unit refund . Once payments depend on life contingencies , Rule 22e-1 exempts the separate account from Section 22(e)'s redemption requirement, so the owner generally cannot cash out the contract.
Charges and Riders
Charge What it pays for
Mortality and expense (M&E) risk charge The insurer's guarantees (such as the death benefit) and expense risk; typically a significant annual percentage of account value
- Administrative fees Recordkeeping; often a flat annual contract fee plus a small percentage
- Underlying fund expenses Management fees and other expenses of each subaccount portfolio
- Surrender charge (CDSC) A declining charge on withdrawals during the surrender period, often 6 to 10 years
Rider charges Optional enhanced death benefits and living benefits such as guaranteed minimum income or withdrawal benefits
Rule 22d-2 exempts registered separate accounts from Section 22(d)'s uniform-price requirement so that sales loads, administrative charges and deductions may vary . The variations must be disclosed in the prospectus as precisely as possible, reflect differences in costs or services , and not be unfairly discriminatory . Many contracts also let owners withdraw a stated percentage each year free of surrender charges.
Tax Treatment
Non-qualified VA earnings are taxed as ordinary income when withdrawn. Withdrawals are generally treated as coming from earnings first.
Taxable withdrawals before age 59 1/2 generally incur an additional 10% federal tax penalty unless an exception, such as death or disability, applies.
Heirs do not receive a stepped-up basis on annuity gains.
Under Internal Revenue Code Section 1035 , an owner may exchange a life insurance policy for a life policy or an annuity , and an annuity for an annuity , without current tax. Exchanging an annuity for a life insurance policy does not qualify.
Placing a VA inside an IRA or other qualified plan adds no additional tax deferral . The recommendation must rest on other features, such as the death benefit or lifetime income (Section 5.4).
Variable Life Insurance
VLI provides a death benefit plus a cash value that fluctuates with the subaccounts. Scheduled-premium VLI has fixed premiums and typically a guaranteed minimum death benefit. Variable universal life has flexible premiums, and the policy can lapse if cash value falls too low. Policy loans and withdrawals reduce cash value and the death benefit. Hypothetical illustrations in VLI communications are limited to gross rates of 12% and must include a 0% illustration (Rule 2211, Section 4.3).
FINRA Rule 2320: Member Obligations for Variable Contracts
Provision Requirement
Receipt of payment (2320(c)) A member may sell a variable contract only at a value determined after payment is received under the contract and prospectus. Payment is generally treated as received when the insurer accepts the application.
Transmittal (2320(d)) A member that receives applications or purchase payments must transmit them promptly to the issuer, along with at least the portion of the payment to be credited to the contract.
Selling agreements (2320(e)) A principal underwriter may sell through another broker-dealer only if that firm is a FINRA member with a sales agreement. The agreement must require return of the commission if the contract is redeemed within seven business days after the application is accepted.
Redemption (2320(f)) A member may sell only contracts whose insurer undertakes to make prompt payment on proper redemption requests.
Compensation (2320(g)) Cash and non-cash compensation rules, including the $300 gift limit and training-meeting conditions (Sections 6.1 to 6.3).
Rule 2330's suitability, disclosure and principal-review rules for deferred VAs build on this foundation and are covered in Section 5.4.