Characteristics of Variable Products
Variable life insurance products are unique because they combine life insurance protection with investment options. Understanding what makes these products different—and the additional regulations that apply—is essential for the exam.
What Makes Variable Products Different?
Variable life insurance is a type of permanent life insurance where the cash value is invested in securities-based investment options called subaccounts. Unlike traditional life insurance where the insurer bears all investment risk, variable products shift investment risk to the policy owner.
| Feature | Traditional Life Insurance | Variable Life Insurance |
|---|---|---|
| Cash value investments | Insurer's general account | Separate account (subaccounts) |
| Investment risk | Borne by insurer | Borne by policy owner |
| Cash value fluctuation | Stable/guaranteed | Varies with market |
| Regulation | State insurance laws only | State insurance + federal securities laws |
The Separate Account
A separate account is an investment account maintained by the insurance company that is legally separated from the insurer's general account.
Why Separate?
| General Account | Separate Account |
|---|---|
| Insurer's own assets | Policy owner's allocated funds |
| Backs guaranteed products | Backs variable products |
| Protected from insurer insolvency | Also protected from insurer creditors |
| Invested conservatively | Invested in market securities |
How It Works
- Premium is paid to the insurance company
- After deductions (COI, expenses), remainder goes to separate account
- Policy owner selects subaccounts for investment
- Cash value rises or falls based on subaccount performance
Subaccounts
Subaccounts are the investment options within the separate account. They function similarly to mutual funds.
Common Subaccount Types
| Subaccount Type | Investment Focus | Risk Level |
|---|---|---|
| Money market | Short-term securities | Low |
| Bond/Fixed income | Government and corporate bonds | Low to moderate |
| Balanced | Mix of stocks and bonds | Moderate |
| Growth | Growth-oriented stocks | Moderate to high |
| Aggressive growth | Small-cap, emerging markets | High |
| International | Foreign securities | High |
Key Points About Subaccounts
- Each subaccount has its own investment objective
- Policy owners choose how to allocate among subaccounts
- Allocations can typically be changed periodically
- Each subaccount charges its own management fees
- Performance varies—there are no guarantees
Securities Registration Requirements
Because variable products involve investment risk, they are regulated as securities under federal law.
Dual Regulation
Variable life insurance is subject to:
| Regulator | Authority |
|---|---|
| State insurance department | Insurance regulation |
| SEC (Securities and Exchange Commission) | Securities registration |
| FINRA | Broker-dealer and representative conduct |
Registration Requirements
| Requirement | Description |
|---|---|
| Securities Act of 1933 | Variable products must be registered with the SEC |
| Investment Company Act of 1940 | Separate accounts must register as investment companies |
| Form N-6 | Registration form for variable life separate accounts |
What This Means for Sales
- Sellers must hold securities licenses (Series 6 or 7)
- Must also hold state insurance license
- Must provide prospectus before or at time of sale
- Subject to FINRA suitability rules
Prospectus Requirement
A prospectus is a legal document that provides detailed information about the variable product. It must be provided to prospective buyers.
What the Prospectus Contains
| Section | Information Provided |
|---|---|
| Product description | How the policy works |
| Fees and charges | All costs including subaccount fees |
| Investment options | Description of each subaccount |
| Risks | Investment risks and potential for loss |
| Death benefit | How death benefit is calculated |
| Surrender charges | Penalties for early withdrawal |
Prospectus Delivery Requirements
| Timing | Requirement |
|---|---|
| Before sale | Prospectus must be delivered before or at time of sale |
| Updates | Updated prospectus provided annually |
| Summary prospectus | Shortened version may satisfy delivery requirement |
Exam Tip: Variable products REQUIRE a prospectus. No prospectus = no sale. This is a fundamental securities law requirement.
Key Differences from Non-Variable Products
| Feature | Non-Variable | Variable |
|---|---|---|
| Guarantees | Cash value and death benefit guaranteed | Only minimum death benefit may be guaranteed |
| Investment risk | None for policy owner | Full investment risk on policy owner |
| Licensing | Insurance license only | Insurance + securities license |
| Prospectus | Not required | Required |
| Regulation | State only | State + federal |
Key Takeaways
- Variable products invest cash value in separate accounts with market-based subaccounts
- Policy owners bear the investment risk—cash value can increase or decrease
- Variable products are securities regulated by the SEC and FINRA
- Sellers must hold both insurance and securities licenses
- A prospectus must be provided before or at the time of sale
- Form N-6 is used to register variable life separate accounts with the SEC
In a variable life insurance policy, the investment risk is borne by:
Variable life insurance products are regulated by:
Before selling a variable life insurance policy, the agent must:
8.2 Variable Life Insurance
Continue learning