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6.2 Variable Annuity Transactions

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Series 6 Investment Company Products

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1 Introduction

About the Series 6 Exam How to Use This Course

2 Chapter 1: Regulatory Fundamentals

1.1 Securities Regulations Overview 1.2 FINRA Rules and Structure 1.3 Communications with the Public 1.4 Prospectus Requirements 1.5 Ethical Standards and Prohibited Practices

3 Chapter 2: Investment Company Products

2.1 Mutual Funds Overview 2.2 Types of Mutual Funds 2.3 Share Classes and Sales Charges 2.4 Reducing Sales Charges 2.5 Mutual Fund Taxation 2.6 Mutual Fund Operations 2.7 Unit Investment Trusts (UITs) 2.8 Exchange-Traded Funds (ETFs) 2.9 Closed-End Funds

4 Chapter 3: Variable Contracts

3.1 Variable Annuities Overview 3.2 Accumulation and Annuity Phases 3.3 Annuity Payout Options 3.4 Annuity Features and Riders 3.5 Variable Annuity Taxation 3.6 Variable Life Insurance 3.7 Variable Life Insurance Taxation 3.8 Variable Contract Suitability

5 Chapter 4: Customer Accounts

4.1 Types of Customer Accounts 4.2 Retirement Accounts 4.3 529 College Savings Plans 4.4 Customer Identification Program (CIP) 4.5 Know Your Customer (KYC) 4.6 Account Documentation and Disclosures 4.7 Special Account Situations

6 Chapter 5: Suitability & Recommendations

5.1 Suitability Obligations 5.2 Investment Objectives 5.3 Risk Tolerance and Time Horizon 5.4 Making Suitable Recommendations 5.5 Retirement Planning Recommendations 5.6 Education Planning Recommendations 5.7 Recognizing Unsuitable Recommendations

7 Chapter 6: Processing Transactions

6.1 Mutual Fund Transactions 6.2 Variable Annuity Transactions 6.3 Trade Confirmations 6.4 Account Statements 6.5 Recordkeeping Requirements 6.6 Error Resolution

6.2 Variable Annuity Transactions

Key Takeaways Explain This Topic AI

Applications require owner/annuitant/beneficiary info and suitability data.

Principal approval is required before submission under Rule 2330.

Free look periods are typically 10-30 days.

Most contracts allow 10% annual free withdrawals; excess is subject to surrender charges.

1035 exchanges must be direct transfers with the same owner and annuitant.

Annuitization is generally irrevocable once payments begin.

Last updated: January 2026

Variable annuity transactions involve insurance company processes in addition to securities regulations. Understanding purchase applications, withdrawals, surrenders, and exchanges is important for Series 6 success.

  • Initial Purchase Process
  • Application Requirements

Variable annuity applications typically require:

  • Information Purpose
  • Owner information Name, address, SSN, date of birth
  • Annuitant information Person whose life determines payouts
  • Beneficiary designation Who receives death benefit
  • Premium amount Initial investment
  • Subaccount allocation Investment selections
  • Rider elections Optional benefits (GMIB, GMWB, etc.)
  • Suitability information Financial situation, objectives, risk tolerance
  • Principal Review (FINRA Rule 2330)

Before the application is transmitted to the insurance company:

  • Registered principal must review and approve
  • Must verify suitability documentation
  • No later than 7 business days after OSJ receives complete application
  • Free Look Period

After receiving the contract, owners have a free look period :

  • Typically 10 to 30 days depending on state
  • Can cancel for full refund of premiums
  • No surrender charges apply
  • Allows time to review contract terms
  • Additional Premium Payments

Flexible premium annuities allow additional investments:

  • Subject to minimum amounts (often $50-$250)
  • May be set up as systematic investments
  • Allocated according to current instructions
  • No new free look period
  • Withdrawals and Partial Surrenders
  • Free Withdrawal Provision

Most contracts allow 10% annually without surrender charges:

  • Based on account value or premiums paid
  • May or may not be cumulative
  • Withdrawals beyond free amount subject to surrender charges
  • Withdrawal Process
  • Step Description
  • 1 Customer requests withdrawal
  • 2 Firm verifies request authenticity
  • 3 Calculate amount (including surrender charge if applicable)
  • 4 Process 10% penalty if under age 59½
  • 5 Withhold taxes if requested/required
  • 6 Send proceeds to customer
  • Tax Withholding
  • Situation Withholding
  • Non-qualified annuity Optional (customer can elect)
  • Qualified annuity (IRA, etc.) 10% federal unless waived
  • Under age 59½ Subject to 10% IRS penalty on taxable amount
  • Full Surrender

Surrendering the entire contract:

  • Receives cash surrender value
  • Cash value minus any applicable surrender charges
  • Minus any outstanding policy loans
  • Taxable on earnings (LIFO)
  • 10% penalty if under 59½
  • Surrender Charge Calculation Example
  • Contract Details Amount
  • Account value $150,000
  • Premiums paid $100,000
  • Surrender charge (Year 3 = 5%) $7,500
  • Cash surrender value $142,500

Tax calculation:

  • Taxable earnings: $42,500 ($142,500 - $100,000)
  • Plus 10% penalty if under 59½: $4,250
  • 1035 Exchanges
  • Process Overview

A 1035 exchange transfers from one annuity to another tax-free:

  • Step Timeline
  • 1. Complete new application Day 1
  • 2. Complete 1035 exchange form Day 1
  • 3. Submit to new carrier Day 1-3
  • 4. New carrier requests funds from old carrier Week 1-2
  • 5. Old carrier processes and transfers Week 2-4
  • 6. New contract funded Week 2-6
  • Typical timeline: 2-6 weeks depending on carriers involved
  • 1035 Requirements

For tax-free treatment:

  • Same owner - Must be the same contract owner
  • Same annuitant - Must be the same person
  • Direct transfer - Funds must go directly between carriers
  • No constructive receipt - Owner cannot receive funds personally
  • 1035 Suitability Considerations

Before recommending a 1035 exchange, consider:

Factor Question to Ask

Surrender charges Is the old contract still in surrender period?

Benefits lost What guarantees or step-ups will be forfeited?

New surrender period Will this reset the clock?

Fee comparison Are fees comparable or lower?

Customer benefit Is there a documented benefit for the customer?

  • Annuitization
  • Election Process

When electing to annuitize:

  • Select payout option (life only, period certain, joint, etc.)
  • Determine start date
  • Complete annuitization election form
  • Irrevocable once payments begin
  • Timing Considerations
  • Factor Impact
  • Age Older = higher payments (shorter life expectancy)
  • Payout option Life only = highest; joint = lowest
  • AIR selection Higher AIR = higher initial payment but payments may decrease
  • Death Benefit Claims
  • During Accumulation Phase

When the annuitant dies before annuitization:

  • Step Description
  • 1 Beneficiary notifies insurance company
  • 2 Submit death certificate
  • 3 Complete claim forms
  • 4 Insurance company calculates death benefit
  • 5 Beneficiary elects distribution option
  • Death Benefit Distribution Options
  • Option Description
  • Lump sum Receive full amount immediately
  • 5-year rule Distribute entirely within 5 years
  • Life annuity Based on beneficiary's life expectancy
  • Spousal Continuation

Surviving spouse may have option to:

  • Continue the contract as new owner
  • Maintain tax-deferred status
  • Delay distribution requirements
  • Key Exam Points
  • Principal approval - Required before submitting VA application
  • Free look - 10-30 days to cancel with full refund
  • 10% free withdrawal - Typically allowed annually
  • 1035 exchange - 2-6 weeks, direct transfer required
  • Surrender charges - Deducted from account value
  • Annuitization irrevocable - Cannot be undone once started
  • Death benefit - Beneficiary options include lump sum, 5-year, or annuity