Variable Life and Variable Universal Life

How Do Separate Accounts Affect Policy Value?

• A separate account holds investments supporting variable benefits apart from the insurer's general account. The owner chooses among its offered subaccounts, investment divisions usually linked to portfolios or funds.

• Those options invest in securities such as stock or bond portfolios.

• Their values rise or fall with investment results and expenses.

• Diversification spreads exposure across different investments. Splitting money between two subaccounts with the same holdings in the same proportions leaves the underlying concentration unchanged. Different names alone do not spread the investment risk.

• The insurer may offer a minimum death-benefit guarantee if contract conditions are met, but that does not guarantee positive cash-value performance.

How Do Variable Whole Life and Variable Universal Life Differ?

• Variable universal life combines separate-account investment choices with flexible premiums and adjustable death benefits.

• Traditional variable life generally uses a scheduled premium; variable universal life adds premium flexibility. Check the particular contract’s guarantees and funding requirements.

• Ordinary whole life can also use scheduled premiums, with a guaranteed cash-value schedule instead of owner-selected securities subaccounts. Its guarantees depend on meeting the policy's premium and other conditions.

• Variable whole life is permanent insurance, subject to its premium and coverage conditions. A drop in cash value does not turn it into term insurance.

• Indexed life applies the policy’s index-linked crediting formula. The formula does not give the owner direct ownership of the index’s securities. Variable life instead links separate-account value to the performance of the selected securities portfolios.

• The owner must monitor whether account value can support insurance charges.

• Poor investment performance, withdrawals, or low premiums can increase lapse risk, the risk that coverage ends because its funding conditions are not met.

• Policy loans and loan interest can also reduce the value supporting coverage. A separate no-lapse or death-benefit guarantee applies only while its stated premium, debt, period, and other conditions are met; it does not guarantee variable cash value.

How Can You Calculate an Added Premium?

• Investment losses and policy charges reduce the value available to support coverage. An owner may need to add money within the contract's funding limits.
• Apply each change to the stated base and in the stated order. Subtract a market loss and policy deductions before calculating a deposit needed to reach a target balance.
• That target balance is a planning assumption. It does not promise lifetime coverage or future investment returns.

Example: Value starts at $10,000, falls by 5%, and then incurs a $200 deduction. The owner wants a $10,000 balance, and the full deposit will be credited.

1. Market loss: $10,000 × 5% = $500.
2. Value after loss: $10,000 − $500 = $9,500.
3. Value after deduction: $9,500 − $200 = $9,300.
4. Required deposit: $10,000 − $9,300 = $700.

Exam Tip: Gotchas

• Premium flexibility does not remove policy deductions.

Who Bears the Risk, and What Does the Prospectus Explain?

In a fixed universal-life design, the insurer credits interest under its contract.

• In variable life, the policyowner bears investment risk in the separate account.
• The value can decline, and a policy may require higher premiums to maintain coverage.
• A producer should not describe a variable policy as a guaranteed investment or a bank deposit.

Variable contracts are insurance products with securities investment features.

• A prospectus is a disclosure document describing a securities product. The contract and underlying-fund prospectuses describe product features, investment objectives, risks, performance, and fee or expense categories.
• They do not by themselves state the buyer's actual insurance amount or personalized fee amounts. Review the policy, illustration, and other purchase materials, and evaluate the buyer's protection needs, time horizon, goals, and capacity for loss separately.
• To compare projected costs, use the same person, coverage, policy period, and assumptions. Convert monthly policy charges to the same period as investment-option expenses, then add only comparable amounts.

What Does an Illustration Promise?

• An illustration projects policy benefits and values using stated assumptions. It can show hypothetical performance rates.

• Hypothetical rates are not promises.

• Review charges, mortality costs for the life-insurance protection, surrender terms for ending the policy and taking available value, guarantees, and what the policy would require if performance is lower than illustrated.

Exam Tip: Gotchas

• The separate account exposes the policyowner to market risk.
• Flexible premium does not mean the owner can skip funding without consequences.
• A death-benefit guarantee, if present, does not guarantee the cash value.

What Should You Check on Exam Day?

• Who bears separate-account investment risk?
• What does the prospectus disclose?
• Which projected costs need a same-period comparison?