Variable Life Insurance: Comprehensive Guide for Series 7 Exam

9.2 Variable Life Insurance

Variable life insurance is a unique financial product that combines life insurance protection with investment opportunities. Understanding the intricacies of variable life insurance is crucial for aspiring General Securities Representatives preparing for the Series 7 Exam. This section will provide a comprehensive overview of variable life insurance, covering its structure, benefits, risks, regulatory considerations, and practical applications in the securities industry.

Introduction to Variable Life Insurance

Variable life insurance is a type of permanent life insurance policy that allows policyholders to allocate a portion of their premium payments to a variety of investment options, typically within separate accounts. These accounts often include stocks, bonds, and money market funds. The performance of these investments directly affects the cash value and death benefit of the policy.

Key Features of Variable Life Insurance

• Investment Component: Policyholders can choose from a range of investment options, which can lead to growth in the policy’s cash value and death benefit based on the performance of these investments.
• Flexible Premiums: While variable life policies typically have a minimum premium requirement, policyholders may have the flexibility to adjust their premium payments within certain limits.
• Death Benefit: The death benefit can vary depending on the investment performance, but it will not fall below a guaranteed minimum amount.

Glossary

• Variable Life Insurance: A policy where the death benefit and cash values vary according to the performance of investments.
• Cash Value: The amount available in the policy that can be borrowed against or withdrawn, depending on the policy terms.
• Death Benefit: The payout to beneficiaries upon the insured’s death.

Structure of Variable Life Insurance Policies

Variable life insurance policies are structured to provide both insurance protection and investment opportunities. The policyholder pays premiums, which are allocated to cover insurance costs and fund investments in separate accounts.

Separate Accounts

The separate account is a key feature of variable life insurance. It is distinct from the insurer’s general account and is used to hold the investment assets. The performance of these assets determines the policy’s cash value and death benefit.

• Investment Options: Policyholders can choose from a variety of investment options, including equity funds, bond funds, and balanced funds.
• Risk and Reward: The potential for higher returns comes with increased risk, as the cash value and death benefit can fluctuate based on market performance.

Policy Charges and Fees

Variable life insurance policies typically include several charges and fees, which can impact the policy’s overall performance:

• Mortality and Expense Risk Charge: Covers the insurance company’s risk of insuring the policyholder.
• Administrative Fees: Cover the cost of issuing and maintaining the policy.
• Investment Management Fees: Charged by the fund managers for managing the investment options.

Advantages of Variable Life Insurance

Variable life insurance offers several advantages that make it an attractive option for certain investors:

• Potential for Growth: The investment component allows for the potential growth of cash value and death benefit, depending on market performance.
• Tax Benefits: The cash value grows on a tax-deferred basis, and the death benefit is generally paid out tax-free to beneficiaries.
• Flexibility: Policyholders can adjust their investment allocations to align with their financial goals and risk tolerance.

Risks and Considerations

While variable life insurance offers opportunities for growth, it also comes with risks that must be carefully considered:

• Investment Risk: The cash value and death benefit can decrease if the investments perform poorly.
• Complexity: Variable life insurance policies can be complex, with various fees and charges that can affect the policy’s performance.
• Market Volatility: Policyholders are exposed to market volatility, which can impact the policy’s cash value and death benefit.

Regulatory Considerations

Variable life insurance is subject to both state insurance regulations and federal securities laws. As a result, representatives selling these policies must be licensed in both insurance and securities.

Securities Regulation

• FINRA and SEC Oversight: Variable life insurance is regulated by the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC) due to its investment component.
• Prospectus Requirement: A prospectus must be provided to potential buyers, detailing the investment options, fees, and risks associated with the policy.

Insurance Regulation

• State Insurance Departments: Each state’s insurance department regulates the insurance aspects of variable life policies, including policy forms and premium rates.
• Suitability Standards: Representatives must ensure that variable life insurance is suitable for the client’s financial situation and goals.

Practical Applications and Case Studies

To illustrate the practical applications of variable life insurance, consider the following scenarios:

Case Study 1: Investment Growth Potential

John, a 40-year-old professional, purchases a variable life insurance policy with a $500,000 death benefit. He allocates his premiums to a diversified portfolio within the policy’s separate account. Over the years, the investments perform well, increasing the policy’s cash value and potential death benefit. This growth provides John with additional financial flexibility and the opportunity to adjust his investment strategy as his financial goals evolve.

Case Study 2: Managing Market Volatility

Sarah, a 35-year-old investor, chooses a variable life insurance policy for its investment potential. However, during a market downturn, the cash value of her policy decreases significantly. Understanding the risks, Sarah consults with her financial advisor to rebalance her investment allocations and explore strategies to mitigate the impact of market volatility on her policy.

Best Practices and Common Pitfalls

To maximize the benefits of variable life insurance, consider the following best practices and avoid common pitfalls:

• Regular Review: Periodically review the policy’s performance and investment allocations to ensure they align with your financial goals.
• Understand Fees: Be aware of the policy’s fees and charges, as they can impact the overall performance.
• Risk Management: Diversify investments within the separate account to manage risk and reduce exposure to market volatility.

Summary

Variable life insurance is a versatile financial product that offers both insurance protection and investment opportunities. By understanding its structure, advantages, risks, and regulatory considerations, you can effectively incorporate variable life insurance into your financial planning strategy. As you prepare for the Series 7 Exam, focus on the key features and regulatory aspects of variable life insurance to enhance your knowledge and confidence.

Series 7 Exam Practice Questions: Variable Life Insurance

By understanding these aspects of variable life insurance, you will be well-prepared for the Series 7 Exam and equipped to advise clients on this complex financial product.

In this section

• Variable Life Insurance: Structure and Features
  Explore the comprehensive structure and features of Variable Life Insurance, including premium structures, investment options, policyholder rights, and guarantees. This guide provides detailed insights and practical examples to help you master the Series 7 Exam.
• Investment Components in Variable Life Insurance
  Explore the investment components of variable life insurance, including separate accounts, sub-accounts, and investment options. Understand how these elements function and are managed to enhance policyholder benefits.
• Policy Loans and Withdrawals: Accessing Cash Value in Variable Life Insurance
  Explore the intricacies of policy loans and withdrawals within variable life insurance policies. Understand how these financial maneuvers impact death benefits, policy performance, and your overall financial strategy.