A 1035 Exchange at Age 76 With a New Seven-Year Surrender Schedule
On Monday a representative submits a 1035 exchange for approval. Client Harold N., 76 and married, would move $210,000 from a nine-year-old variable annuity with Carrier A, where the surrender charge has expired, the contract value equals the death benefit, mortality and expense charges are 1.10%, and a guaranteed minimum income benefit rider costs 0.60%. The proposed Carrier B contract has 1.40% mortality and expense charges, a 1.15% guaranteed lifetime withdrawal benefit rider, and a seven-year surrender schedule starting at 7%. The rep's note says the client "wants guaranteed lifetime income and the new rider pays more," and the application is signed. The rep's payout on the new contract is 5.5%; on the old contract it is a 0.25% trail. Harold's Social Security and pension cover his expenses, and his health has declined.
1. What is your review deadline under FINRA Rule 2330, and what is your decision? Show the reasoning.
Read the worked answer
Deadline: the principal must review and approve or reject the deferred variable annuity transaction within 7 business days of the rep's submission. That clock is already running.
Fee comparison on $210,000:
- Old: 1.10% + 0.60% = 1.70%, about $3,570/yr, with no surrender charge remaining and an in-force income rider.
- New: 1.40% + 1.15% = 2.55%, about $5,355/yr, roughly $1,785 more per year, plus a fresh seven-year surrender schedule running to age 83.
Rule 2330 requires consideration of surrender charges, new surrender periods, loss of existing benefits, increased fees, the customer's age, health, liquidity needs, and investment objective. Here nearly every factor runs against the exchange: a new surrender period begins at 76; a rider already in force is being surrendered at a cost of 30% more in annual charges; and the client's declining health points toward needing liquidity and toward not locking money up, not away from it. A higher roll-up rate can justify an exchange, but the file contains no comparison showing that the new benefit actually exceeds what the existing GMIB will pay.
Decision: reject as submitted. Neither the client's signature nor the insurer's underwriting approval substitutes for the member's independent review.
2. What would a file have to contain for you to approve any version of this exchange?
Read the worked answer
Minimum documentation:
- A side-by-side comparison of the old and new contracts: all charges, rider costs, surrender schedules, death benefit, and the projected income each contract would actually pay, not just the crediting rate.
- Customer-specific facts: income sources, expenses, liquid reserves, health, and expected need for access to the money.
- An explanation of why turning on or annuitizing the existing GMIB is inferior to paying more for the new rider.
- Clear disclosure of surrender charges, new surrender period, and fees, plus disclosure of the rep's compensation difference (5.5% versus a 0.25% trail) as a conflict.
- Mechanics: a direct trustee-to-trustee transfer to preserve tax deferral under Section 1035.
Note also that the free-look period is a safety net for buyers, not a defense for a principal who approved an unsuitable exchange.
3. The rep argues the client signed, the carrier approved it, and the client insists. How do you handle that, and what else do you check?
Read the worked answer
Hold the line and document it. Write a memo stating the rejection and the specific reasons (fee increase, new seven-year surrender at 76, loss of the in-force rider, no benefit comparison), notify the rep in writing, and escalate to the CCO.
Then widen the lens:
- Pull the rep's last 12 months of annuity exchanges. A single marginal exchange is a coaching issue; a pattern of replacing older contracts with new seven-year surrenders in clients over 70 is a supervisory and possibly reporting issue under Rule 4530.
- Confirm the rep completed the Rule 2330(b)(3) product training for this carrier and product.
- Check whether compensation drove the recommendation; a 5.5% payout versus a trail is a conflict that demands heightened scrutiny, not a veto, but it must be documented.
If Harold still wants more guaranteed income, look for a modified proposal, such as a partial exchange or activating the existing rider, rather than approving the full replacement under pressure.