Key Takeaways
- Variable annuities in California require both a life insurance license and FINRA securities registration (Series 6 or 7)
- Fixed indexed annuities are regulated as insurance products and do not require securities licensing in California
- California requires enhanced suitability analysis for variable annuities due to investment risk
- Producers must clearly explain the difference between guaranteed and non-guaranteed elements
- Replacements of variable annuities are subject to heightened scrutiny due to potential loss of living benefits
California Variable Annuity and Indexed Annuity Regulations
California regulates variable and indexed annuities with specific requirements due to their complexity and potential risks to consumers.
Variable Annuity Requirements
Licensing Requirements
To sell variable annuities in California, producers need:
| License Type | Requirement |
|---|---|
| California Life License | Required (insurance component) |
| FINRA Registration | Series 6 or Series 7 |
| Broker-Dealer Affiliation | Must be affiliated with B/D |
| Variable Lines Certification | California variable certification |
Why Dual Licensing
Variable annuities have:
- Insurance company guarantees (insurance regulation)
- Investment in securities subaccounts (securities regulation)
- Both CDI and SEC/FINRA oversight
Exam Tip: Variable annuities require BOTH a California life insurance license AND FINRA securities registration. Fixed indexed annuities only require the insurance license.
Fixed Indexed Annuity Requirements
Regulatory Status
Fixed indexed annuities (FIAs) in California:
| Feature | Regulatory Treatment |
|---|---|
| Classification | Insurance product (not security) |
| License Required | California Life insurance license only |
| FINRA Registration | NOT required |
| Principal Guarantee | Must be guaranteed by insurer |
| Interest Crediting | Linked to index, but principal protected |
Suitability for FIAs
Even without securities requirements, FIAs require:
- Full suitability analysis
- Clear explanation of index linking
- Disclosure of caps, spreads, and participation rates
- Explanation of surrender charges
Enhanced Suitability for Variable Annuities
Variable annuities require heightened suitability analysis:
Additional Considerations
| Factor | Requirement |
|---|---|
| Investment Risk | Consumer must understand potential loss |
| Fee Understanding | All fees including M&E charges |
| Sub-Account Selection | Appropriate for risk tolerance |
| Tax Treatment | Loss of capital gains treatment |
| Time Horizon | Long-term investment appropriate |
Variable Annuity Fees
| Fee Type | Description |
|---|---|
| M&E (Mortality & Expense) | Insurance company guarantee costs |
| Administrative Fees | Record-keeping and administration |
| Sub-Account Expenses | Underlying fund fees |
| Rider Charges | Living benefit and other riders |
| Surrender Charges | Early withdrawal penalties |
Disclosure Requirements
Variable Annuity Disclosures
| Disclosure | Timing |
|---|---|
| Prospectus | Must deliver before or with application |
| Statement of Understanding | Before application |
| Summary of Benefits | Before application |
| Fee Schedule | Before application |
Indexed Annuity Disclosures
| Disclosure | Requirement |
|---|---|
| Index Calculation | How interest is credited |
| Caps and Floors | Maximum and minimum crediting |
| Participation Rate | Percentage of index gain credited |
| Spread/Margin | Deduction from index return |
| Surrender Charges | Complete schedule |
Living Benefit Riders
Common Rider Types
| Rider | Description |
|---|---|
| GMIB | Guaranteed Minimum Income Benefit |
| GMWB | Guaranteed Minimum Withdrawal Benefit |
| GMAB | Guaranteed Minimum Accumulation Benefit |
| GLWB | Guaranteed Lifetime Withdrawal Benefit |
Rider Considerations for Suitability
- Additional cost of rider
- Whether consumer needs the guarantee
- Impact on overall returns
- Conditions for triggering benefit
Variable Annuity Replacements
Heightened Scrutiny
Variable annuity replacements are closely reviewed for:
| Concern | Why It Matters |
|---|---|
| Living Benefits Lost | May surrender valuable guarantees |
| New Surrender Charges | Reset of surrender period |
| Tax Consequences | Potential surrender charges |
| Cost Comparison | Is new product truly better? |
1035 Exchange Considerations
When using 1035 exchange to replace:
- Tax-deferred transfer continues
- New surrender charges typically apply
- Living benefits from old contract lost
- Must document why exchange benefits client
Replacement Documentation
| Document | Requirement |
|---|---|
| Comparison | Side-by-side old vs. new |
| Reason for Replacement | Documented benefit to client |
| Surrender Charges | Both contracts' schedules |
| Living Benefits | Comparison of guarantees |
| Fees | Comparison of all fees |
Indexed Annuity Specifics
Understanding Index Crediting
| Method | Description |
|---|---|
| Point-to-Point | Index change start to end of period |
| Monthly Averaging | Average of monthly index values |
| Monthly Sum | Sum of monthly index changes |
| Annual Reset | Index resets each year |
Caps, Floors, and Participation Rates
| Term | Meaning |
|---|---|
| Cap | Maximum interest rate credited |
| Floor | Minimum (usually 0%, no loss) |
| Participation Rate | % of index gain credited |
| Spread/Margin | Deduction from return |
Example Calculation
If index gains 10%, with 80% participation rate and 6% cap:
- 10% x 80% = 8% calculated interest
- Cap limits to 6%
- Interest credited: 6%
Exam Tip: Know how caps, participation rates, and spreads work together to determine interest credited on fixed indexed annuities. These are commonly tested concepts.
What licenses are required to sell variable annuities in California?
Do fixed indexed annuities require securities licensing in California?
What does "participation rate" mean for a fixed indexed annuity?
What is a major concern when replacing an existing variable annuity?
What document must be delivered before or with a variable annuity application?