Which statement concerning the Securities Act of 1933 and insurance products classified as securities is correct?

• A. The primary impact of the act on insurance agents is that a prospectus must be given to applicants.
• B. There is an exclusion under the act for most variable insurance contracts.
• C. The act requires that unregistered securities be sold through the U.S. mail.
• D. Violations of the act are limited to civil penalties, but the penalties can be severe.

Answer: (A)

When a life insurance product is treated as a security, federal disclosure rules apply. The Securities Act of 1933 requires that any security offered to the public be registered and that investors receive a full, clear prospectus describing the investment, risks, and costs. For variable life and similar variable contracts, the security aspect means the contract’s value depends on a separate account’s investments, so the sale must include a prospectus to help buyers make an informed decision. Because of this, the primary impact on insurance agents is the obligation to provide the prospectus to applicants at the time of sale.

There isn’t a blanket exemption for most variable contracts under the act, so assuming an exclusion exists would be mistaken. The act also doesn’t mandate that unregistered securities be sold specifically through the U.S. mail; rather, it generally prohibits the sale of unregistered securities unless a proper exemption applies. And violations aren’t limited to civil penalties—criminal penalties can apply for willful fraud or other serious violations.