"they said the proceeds from the non qualified variable anniuty is taxed on a "LAST IN/First out basis!"
What you were told is wrong. There is no LIFO treatment
For nonperiodic distributions, distributions come first from taxable gains. Only after all taxable gains have been distributed is any of your nontaxable investment in the contract distributed. (26 U.S. Code § 72(e))
For periodic distributions after annuitizing, the nontaxable amount is in the same proportion as the investment in the contract is to the expected return. (26 U.S. Code § 72(b))
Also see IRS Pub 575: https://www.irs.gov/pub/irs-pdf/p575.pdf
