Susan, not having seen the policy or contract it is hard to give you a specific response. If the death benefit is tied to the annunity contract you would have to the look at how closely they are tied and if they can be separated. What is the primary purpose for the combined transaction? It could be that the transaction is more of a personal nature, i.e. insurance protection, as opposed to a transaction engaged in for profit. A loss on a personal personal transaction won't qualifiy under Section 165(c)(2); it would be a personal loss and not deductible anywhere. If the variable annunity can be segregrated from the the death benefit you may have an argument if you sale or exchange it at a loss.

Remember to claim a loss on a 1040, Line 14 is an aggressive position and needs to be well though out and discussed with your client.

Good Luck.