SIE Understanding Products and Their Risks Question 54: Answer and Explanation

Question: 54

Which of the following is correct regarding variable contracts?

• A. They typically have less guarantees than mutual funds or UITs, so their internal fees are lower.
• B. Representatives are typically paid lower commissions for selling variable contracts than for other investment products.
• C. FINRA Rule 2330 requires the company issuing the variable contract and the representative soliciting and recommending the variable contract to assure the suitability of the contract as a whole and the suitability of the selection of specific investment choices (subaccounts) for the investor.
• D. An owner of a variable contract typically does not need to hold cash equivalents because of the availability of policy loans from the variable contract.

Correct Answer: C

Explanation:

C: Choice C is correct because FINRA Rule 2330 requires the company issuing the variable contract and the representative soliciting and recommending the variable contract to assure the suitability of the contract as a whole and the suitability of the selection of specific investment choices (subaccounts) for the investor. Choice A is incorrect because variable contracts typically have more guarantees than mutual funds or UITs, so internal fees are higher. Choice B is incorrect because representatives are typically paid higher commissions for selling variable contracts than for other investment products. Choice D is incorrect because variable contracts typically do not allow policy loans. Withdrawing funds during the surrender period incurs surrender charges. Therefore, the owner of a variable contract should hold adequate cash equivalents in case of emergency, in order to avoid needing premature withdrawals from the variable contract.