Chapter 7-Variable Life and Variable Universal Insurance

Question 1

What are the characteristics of a variable life insurance policy?

Answer 1

• Requires registration with the SEC as a security
• Does not have guaranteed minimum interest rates
• Does not have guaranteed minimum cash values
• Death benefit has minimum guarantee (target rate performance adjusts death benefit higher or lower but not less than original face)
• Policyowner selects the broad category of investments for their cash value such as bond fund, stock fund, or money market fund like variable policies (not particular securities) or a managed portfolio fund option where the insurer makes the investment allocation decisions for the policy owner
• Premium flexibility like universal life policies (fixed but adjustable)
• Level and increasing death benefit designs life universal policies
• No fixed redetermination dates
• Policy for those who want to assume investment risk
• Limited guarantees to max mortality charges

(Policies are not able to be part of the insurer’s general investment portfolio)
(Insurers offer broader investment options than before)

Question 2

How are death benefits related to the performance of variable life policies?

Answer 2

• The death benefit never falls below the amount of coverage present when the policy was first purchased
• Under the level additions model, excess investment returns are used to buy single premium level additions to the death benefit
• Under the constant ratio model, excess investment earnings are used to buy single premium decreasing additions to the death benefit amount to ensure the policy meets the IRS’s “corridor test”
• Investment performance below targeted levels may result in a decrease of the death benefit

Question 3

What are the characteristics of cash value in a variable life policy?

Answer 3

• Value fluctuates daily
• Nonforfeiture options are available like whole life policies
• Cash value is reduced by expenses and mortality charges
• Policy loans are available (in smaller amounts than whole life policies)

Question 4

What is included in a variable life prospectus?

Answer 4

• full disclosure of all the provisions of the policy
• Insurer’s expense charges (commissions, premium taxes, administrative charges, etc)
• Applicable surrender charges
• Detailed mortality charges
• Benefit provisions
• Policyowner contract rights
• Investment options available to policy owner

Question 5

What are the characteristics of a variable adjustable life policy?

Answer 5

• Death benefit may increase/decrease at specified dates (between adjustment periods, the death benefit reflects investment performance)
• Premium paying period may increase/decrease at specified dates
• Policyowner may make investment decisions
• Premium payments may be negotiated up/down with the insurance company periodically but remain level between negotiations

Question 6

Does a variable universal life policy death benefit reduction that forces a cash value distribution to retain IRS life insurance status result in taxable income?

Answer 6

Yes

Question 7

How does cash value differ between variable life and whole life policies?

Answer 7

• Variable life cash values are premiums minus expenses and mortality charges
• Variable life policy cash values fluctuate daily
• Whole life cash values do not disclose expense and mortality calculations
• Whole life cash values are determined by the net asset value of the separate account funds that make up the portfolio underlying the policy and once determined that amount is guaranteed and steadily increases throughout the policy life