Series 6: Variable Products (Variable Life Insurance)

How often must the insurer calculate the cash value and death benefit for a variable life insurance policy?

Cash value monthly; death benefit annually While the insurer must calculate the value of the separate account (NAV) daily, it must calculate the cash value at least monthly and death benefit at least annually. Some insurers make these calculations more often than the law requires.

Variable life policy holders must receive a policy statement at least:

annually Insurance companies must provide an annual statement of death benefit to policyholders, detailing all earnings and charges for that year. The annual statement will also include the current cash value and amount of any policy loan. The SEC requires that investment companies send semi-annual financial statements to shareholders (or separate account unit holders). Each policy funded by a separate account must meet the SEC reporting requirements for investment companies.

Which of the following will increase the cash value of a variable life insurance policy? I Premiums II Dividends III Loans IV Withdrawals

I and II only Cash value will increase from payments of premiums since new investment is being made in the separate account. Dividends and interest earned in the separate account will also increase cash value. In contrast, loans and withdrawals (a surrender of the policy) reduce cash value.

All of the following conditions apply to a policy owner who chooses to convert a variable life policy to a whole life policy EXCEPT:

insurers may require evidence of insurability to complete the conversion Federal law provides for the conversion privilege during the first two years of a variable life policy into a whole life policy with the same face value and premiums based on the purchase date of the original variable life policy. The insurer cannot require evidence of insurability to convert a variable life policy to a whole life policy under these circumstances.

The "free look" period for a variable life insurance policy permits the return of the policy with a full refund of premiums paid based on all of the following EXCEPT:

2 years after the insurer issues the policy During the free look period, the policyholder can return the policy and receive a full refund of premiums paid up to the latest of: 10 days after receiving the contract; or 45 days after signing the application; or 10 days after the issuer mails a notice of the withdrawal right.

The death benefit of a variable life insurance policy:

has a fixed minimum that may increase based on investment performance Variable life insurance guarantees a policyholder a minimum death benefit, regardless of investment performance. Even if the investment performance is greatly below expectations, the contract guarantees the minimum death benefit. With favorable investment performance, the death benefit can increase, and there is no maximum upper limit for this death benefit.

For which of the following types of life insurance can policyholders vote for the members of a board of managers? I Universal life II Variable universal life III Whole life IV Variable life

II and IV only Owners of variable life and universal variable life insurance policies have voting rights because the insurer invests the cash values in separate accounts, which technically are investment company securities. The separate account unit holders get to vote at both the separate account level and at the level of the underlying mutual fund investment via proxy. Whole life and universal life insurance do not use separate accounts, so there are no voting rights.

What is the result if the performance of the separate account for a variable life policy is greater than the assumed interest rate (AIR)?

The death benefit increases The AIR has no direct bearing on cash value. Cash value grows with positive portfolio returns in the separate account. As additional premiums are paid into the contract, this will increase cash value. If a loan is taken or if portfolio returns are negative, this will decrease cash value. AIR is used to determine the death benefit in a variable life policy. If the separate account performance is greater than the AIR, the death benefit increases; if the separate account performance is less than the AIR, the death benefit decreases, but never below the minimum guaranteed death benefit in the policy.

Which statement is TRUE regarding a variable life settlement?

The variable life settlement provider (buyer) will continue to pay the premiums and will receive the policy's death benefit In a variable life settlement, the buyer of the life insurance policy "buys" the ownership rights of a life insurance policy from an insured individual who is looking for an immediate cash payment. When there are additional premiums to be paid, the investor/buyer (i.e. variable life settlement provider) pays the premiums; and then would receive the death benefit when the insured dies. The risk to the buyer of the policy is that the seller will actually live longer than anticipated, which would reduce or eliminate the return on the investment.

Which of the following permits loans of 100% of the policy cash value to the insured?

Universal life insurance Policyholders may borrow the full amount of cash value from both whole life and universal life policies, since the premiums are invested in the general account Variable life insurance policies limit the amount of cash value a policy owner may borrow to 75% to 90% of cash value. This is the case because investments are held in the separate account and their value may vary. There is no investment component to term insurance so there is no cash value and loans are not permitted.

Variable life insurance has all of the following features EXCEPT:

mortality expenses that are not guaranteed Variable life offers both a guaranteed minimum death benefit and a death benefit that can vary above the minimum according to investment experience. In theory, there is no limit to the maximum death benefit. Variable life premiums are fixed and level for the life of the policy, similar to a whole life policy. The insurer bears the mortality and expense risk with all life insurance policies, so these costs are guaranteed for all insurance policies, including variable life.

An insurance policy that promises to pay a named beneficiary a specified amount of money only if the insured dies within a certain limited time is a:

term life policy Term insurance is the most basic type of insurance policy that, for a fixed premium, promises to pay the beneficiary a specified amount if the insured dies during the term of the policy. After the term is over, the insured can renew for a new term, usually at a higher premium because the insured has aged during the term of the last policy.

Which statement is TRUE?

Variable life insurance was derived from whole life insurance Variable life is a whole life product and was developed from the whole life design with the added feature of investment of cash value in separate accounts. The variable life policy has a fixed annual premium like the whole life policy, but cash value can be invested in equity securities in a separate account for better returns. The cash value can be used to increase the death benefit or can be borrowed against.

For which of the following contracts does the insurer typically invest the premium in the insurer's general account? I Variable life insurance II Universal life insurance III Variable universal life insurance IV Whole life insurance

II & IV only Term life, whole life, and universal life premiums are deposited to the insurance company's general account. The death benefit is fixed based upon premium contribution and is not subject to investment risk. The insurance company invests the premiums collected through its general account and bears the investment risk. Variable contracts (either variable life or variable universal life) have the premiums deposited to a separate account. The performance of the separate account determines the ultimate death benefit, so the policyholder bears the investment risk. Universal variable life gives policyholders the right to skip a premium payment.

Which of the following reports must insurance companies send to policy owners? I Annual statement, indicating current death benefit, cash value, and policy loans II Annual statement, including income from operations, the balance sheet, and investments held in the separate account III Semi-annual statement, reporting current death benefit, cash value, and policy loans IV Semi-annual statement, reporting income from operations, the balance sheet, and investments held in the separate account

I and IV Insurance companies must provide an annual statement of death benefit to policyholders, detailing all earnings and charges for that year. The annual statement will also include the current cash value and amount of any policy loan. The SEC requires that investment companies send semi-annual financial statements to shareholders (or separate account unit holders). Each policy funded by a separate account must meet the SEC reporting requirements for investment companies.

Under state laws, variable life policies are required to compute: I cash value monthly II cash value yearly III death benefit monthly IV death benefit yearly

I and IV Most states (who are the regulators of insurance products) require that the insurance company compute its cash values monthly and death benefits yearly.

Which of the following life insurance policies give the holder investment options? I Whole life II Universal life III Variable life IV Variable universal life

III and IV only Any variable product gives the holder a variable rate of return. The holder selects the type of separate account in which he or she wants to invest. The amount of any payout depends solely on the performance of that separate account. Thus, the holder is assuming the investment risk. As such, SEC rules define variable products as securities and requires their sale under a prospectus. Whole life and universal life give the holder a guaranteed rate of return, with the insurance company determining the type of investments to make in its general account that will fund the future liability. Thus, the insurance company assumes the investment risk. As such, these are not securities, but are insurance products.

Which of the following statements concerning the death benefit and cash value of a variable life policy is correct?

If the AIR is set low, the death benefit will be likely to increase more rapidly In a variable life policy, the Assumed Interest Rate (AIR) is used to calculate the death benefit. If the investment returns exceed the AIR, then the death benefit will increase. If the AIR is set low, the death benefit will be likely to increase more rapidly because returns are likely to exceed AIR. The AIR has no direct bearing on cash value. Cash value grows with positive portfolio returns in the separate account. As additional premiums are paid into the contract, this will increase cash value. If a loan is taken or if portfolio returns are negative, this will decrease cash value.

All of the following are advantages of variable life insurance policies EXCEPT:

flexible premium payments allow owners to vary their payments or even skip payments Variable life insurance requires fixed premium payments in the same way that whole life insurance policies require premium payments according to a fixed schedule. In contrast, universal life and universal variable life provide for flexible premium payments - that is, payments can be skipped. With all cash value life insurance (whole life, universal life, variable life, or variable universal life), the cash value grows tax-deferred. Growth of the separate account for either variable life or variable universal life offers the potential for a higher death benefit than the face value stated on the policy at its inception. Owners can select investment options to meet their objectives for either variable life or variable universal life policies

All of the following statements about variable life insurance and variable annuity contracts are correct EXCEPT both products:

provide for decreased benefits if the investment return is less than the AIR, with no minimum death benefit guarantee If separate account performance is greater than the Assumed Interest Rate in the contract, then the amount of death benefit or annuity payment will increase. If the separate account underperforms the AIR, or if returns are negative, then the death benefit or annuity payment will decrease. But, variable life insurance guarantees a minimum death benefit regardless of separate account performance; and a variable annuity contract offers a death benefit during the accumulation phase equal to the greater of premiums paid or NAV. Premium taxes and sales charges are deducted before any investment is made in the separate account for both a variable life contract and a variable annuity contract. If the owner wishes to surrender the variable life policy or the variable annuity contract, both will refund NAV less any surrender charges.

Which of the following statements concerning variable universal life (VUL) policies are correct? I Premium payments can be skipped II Cash value can be invested in equities III A minimum cash value is guaranteed IV The death benefit is fixed at issuance

I & II only With variable universal life (VUL) policies, the policy owner has flexible premium payments and the cash value is invested in a separate account, typically in equities. A minimum cash value is not guaranteed, and the death benefit may increase or decrease depending on investment results. (Note, however, that with any variable life policy, there is a minimum guaranteed death benefit amount)

Under which of the following circumstances would a universal life insurance policy operate as term insurance?

The policy owner pays a cash premium equal to the required mortality and expense charges and has no cash value Universal life combines elements of term life and whole life policies. The premium is broken down into an insurance element (the term component) and a savings element that is invested in the insurance company's general account (savings component). A universal life policy operates as term insurance when the policy owner pays a premium amount equal to the required mortality and expense charges (these are charges to cover the insurer's basic cost of providing the policy). There is no cash value buildup, so what the policy is providing is de facto term insurance for the face amount of coverage.

Insurers deduct all of the following from the separate account EXCEPT:

Premium taxes The insurer deducts the sales load and premium taxes from the premiums of a variable life insurance policy before depositing the "net premium" to the separate account. It deducts a variety of costs from net assets, typically monthly. These monthly charges include: Cost of Insurance: The amount charged for the cost of the actual insurance policy based on actuarial standards; Administrative Expense Fee: Usually $10 - $15 per month to cover the "paperwork" costs of depositing the premium check and crediting it to the customer's account; Mortality and Expense Risk Fee: A fee to cover the possibility that the insured's life expectancy might differ from the actuarial table and that expenses may increase at a faster rate than expected; Policy Rider Charges: Another insurance charge for the cost of any alterations or "riders" placed into the insurance policy. The investment manager's fee also comes out of the separate account, since it is deducted from the NAV of the underlying mutual fund shares.

In connection with a variable life insurance policy, which of the following exchanges is(are) tax-free?

Separate account for separate account Variable life policy for whole life policy Variable life policy for variable annuity All of these exchanges are tax-free. Exchanges of separate accounts within a variable life policy are not taxable; exchanges from one insurance policy to another are not taxable; and exchanges of one annuity for another are not taxable. An exchange of a life insurance policy for a variable annuity is not taxable. However, the exchange of a variable annuity for a variable life policy is taxable.

The cash value increases at a fixed, guaranteed rate for which of the following life insurance policies?

Whole life Whole life insurance protects the purchaser from increasing premiums as that person ages, and there are no renewals - the policy is good for that person's "whole" life. With a whole life policy, the annual premium is level, and will start out higher than a term life policy. Part of the premium is invested in the insurance company's general account and is guaranteed to grow at a fixed rate. As the general account investment portion grows, the policy builds "cash value" which can be borrowed. Any borrowed funds reduce the benefit payment upon death. Term insurance does not have a cash value. The rate of increase in the cash value of variable life and variable universal life depends on the investment success of the separate accounts and is not fixed or guaranteed.

James Sobel owned a $100,000 variable universal life policy at his death, and his wife Darlene is the beneficiary. Darlene would like to pay off the $75,000 balance of her mortgage so she will have low living expenses. Darlene is age 54 and intends to continue working for several more years. She feels that with her mortgage paid off, she will have adequate income from her job to pay her expenses. Which of the following settlement options is most appropriate for Darlene?

Lump-sum Darlene wants to pay off her mortgage, so a lump sum is most appropriate to provide the sum of money needed to pay this debt. Installments of either a fixed amount or a fixed time would be chosen if payments are needed over a fixed time frame or a minimum payment amount is needed periodically. Interest only would be chosen if the beneficiary does not need the principal and only wants the income from the policy, with the principal amount being willed to another beneficiary. A unit refund life annuity pays for the annuitant's life, but if the annuitant dies early, the unit value in the separate account is refunded to a beneficiary.

Tim Black, a customer seeking life insurance, is unmarried and is 25 years of age. The customer wants coverage that meets his current needs but does not want to lock into a low death benefit if he should later get married and have children. In addition, the customer would like a policy that includes a tax-deferred investment with investment options. To meet the customer's requirements of an increasing death benefit and tax-deferred investment with investment options, you would recommend:

variable universal life insurance Since this customer wants to be able to increase his death benefit, whole life policies and term policies are inappropriate. These policies only offer a fixed death benefit. Universal life policies allow the holder to increase premium payments to fund a higher death benefit. The universal life policy meets the customer's requirement of an increasing death benefit. The customer's second requirement is to have a tax-deferred investment with investment options. With a regular universal life policy, the insurance company makes the investment selection. Under a variable universal life policy, the policyholder makes the investment selection from one of the insurance company's separate accounts. Thus, the best choice for this customer is variable universal life.

Which type of life insurance policy could have a negative rate of return at the end of the year?

Variable life The purchaser of a variable life insurance policy assumes the investment risk. If the separate account funding the variable life policy performs poorly, the rate of return may be less than expected or even negative. Term life is pure insurance with no investment feature, so it has no rate of return. Whole life gives a guaranteed minimum rate of return and it builds cash value based on this guaranteed rate. Universal life provides a rate of return based on the performance of the insurer's general account, which consists of mostly fixed-rate securities. The rate of return may vary from year to year, but it will not drop below a minimum guaranteed level.

All of the following statements are true about a Variable Life Insurance Policy EXCEPT that the policy offers (a):

minimum guaranteed rate of return A variable life policy invests premiums in a separate account holding a designated mutual fund, usually a growth fund. The insurance company gives a minimum guaranteed death benefit, which cannot fall below a set amount, regardless of how poorly the separate account performs. On the other hand, if the separate account does better than expected, the insurance benefit will increase. The policy also offers potential cash value that builds over time, though this is less than with a whole life policy (since the investment funding the policy is a mutual fund held in a separate account and not the "safe" investments in the insurance company's general account). All life insurance policies (Variable Life, Whole Life, Universal Life, Variable Universal Life) have settlement options. These are ways the beneficiary may choose to receive any death benefit payable. However, a variable life insurance contract does not offer a minimum guaranteed rate of return on the separate account.

Insurers generally give a variable life insurance owner investment choices including which of the following investments?

Common stock funds Bond funds Money market funds Insurers generally offer a variety of investment choices in each separate sub-account, including equity funds, bond funds, and money market funds. Insurers may offer other types of funds as well.

Which of the following costs does the insurance company deduct from the premium of a variable life policy prior to making the net investment to the separate account? I Sales load II Investment manager's fee III Policy loans IV Premium taxes

I and IV only The insurer deducts the sales load and premium taxes from the premiums of a variable life insurance policy before depositing the "net premium" to the separate account. It deducts a variety of costs from net assets, typically monthly. These monthly charges include: Cost of Insurance: The amount charged for the cost of the actual insurance policy based on actuarial standards; Administrative Expense Fee: Usually $10 - $15 per month to cover the "paperwork" costs of depositing the premium check and crediting it to the customer's account; Mortality and Expense Risk Fee: A fee to cover the possibility that the insured's life expectancy might differ from the actuarial table and that expenses may increase at a faster rate than expected; Policy Rider Charges: Another insurance charge for the cost of any alterations or "riders" placed into the insurance policy. Please note that the owner does not take policy loans from gross premiums, but from the excess value in the separate account. The investment manager's fee also comes out of the separate account, since it is deducted from the NAV of the underlying mutual fund shares.

Which of the following are advantages of variable life policies? I The investor has the option to choose the type of investments made, assuring compatibility with the investor's objectives II The policy has the potential of paying a higher death benefit than stated in the prospectus due to better than expected growth in the separate account III Any earnings and capital gains from the investment build tax-deferred IV The owner can borrow 100% of cash value against the policy

I, II & III only The advantages of variable life policies include: The investor has the option to choose the type of investments by selecting the proper separate account, assuring compatibility with the investor's objectives. The policy has the potential of paying a higher death benefit than stated in the prospectus due to better growth than expected in the separate account. Any earnings and capital gains from the investment build tax-deferred. Since investment results may vary, the owner cannot borrow 100% of the cash value in a variable life policy. Only a portion of the cash value is available for borrowing (typically 75-90%)

Before the insurance company deposits the premiums for a variable life insurance policy to separate accounts, it will deduct which of the following fees?

Sales load The insurer deducts the sales load and premium taxes from the premiums of a variable life insurance policy before depositing the "net premium" to the separate account. It deducts a variety of costs from net assets, typically monthly. These monthly charges include: Cost of Insurance: The amount charged for the cost of the actual insurance policy based on actuarial standards; Administrative Expense Fee: Usually $10 - $15 per month to cover the "paperwork" costs of depositing the premium check and crediting it to the customer's account; Mortality and Expense Risk Fee: A fee to cover the possibility that the insured's life expectancy might differ from the actuarial table and that expenses may increase at a faster rate than expected; Policy Rider Charges: Another insurance charge for the cost of any alterations or "riders" placed into the insurance policy.

Which of the following statements describes a variable life insurance policy?

The cash value increases based on equity investments Whole life insurance protects the purchaser from increasing premiums as that person ages, and there are no renewals - the policy is good for that person's "whole" life. With a whole life policy, the annual premium is level, and will start out higher than a term life policy. Part of the premium is invested in the insurance company's general account and is guaranteed to grow at a fixed, guaranteed rate. As the general account investment portion grows, the policy builds "cash value" that can be borrowed. Variable life is a variation on whole life where a level annual premium is invested in a separate account, typically invested in equities. Better performance of the securities in the separate account will increase the death benefit, hence the term "variable life," - so the death benefit is not fixed. The policy builds cash value similar to whole life, but the amount of cash value depends on the performance of the separate account. Part (but not all) of this value can be borrowed, since the separate account performance will vary. Any borrowed funds reduce the benefit payment upon death. Universal life gives the policyholder the flexibility to skip some premium payments. Variable life invests premiums in a separate account and typically invests in equities, whereas both whole life and universal life invest premiums in the general account, which must be heavily invested in fixed income securities. Term life has low premiums for a young insured individual, but the premiums increase with each renewal as that person ages.

Which statement concerning variable life insurance (VLI) is FALSE?

The typical policy has a minimum death benefit and a minimum cash value Variable life contracts promise a minimum death benefit. If the separate account performs better than expected, the death benefit will increase; if it performs worse than expected, the death benefit can decline, but will not fall below the promised minimum. Variable life contracts also promise a cash value, based upon the performance of the separate account. However, there is no minimum cash value guarantee. If the separate account performs better than expected, then the account will build cash value. If the separate account performs worse than expected, there may be no cash value. Separate account NAV is computed daily, as is the case with the underlying mutual fund. Because insurance coverage amounts vary with the performance of the separate account, the death benefit amount must be recomputed to reflect this at least annually. Investments held in both insurance company general accounts and separate accounts grow tax deferred, making Choice (D) true.

Which statement regarding loans on life insurance policies is correct?

Variable life insurance allows borrowing of only a fraction of the cash value Variable life insurance policies limit the amount of cash value a policy owner may borrow to 75% to 90% of cash value. This is the case because investments are held in the separate account and their value may vary. There is no investment component to term insurance so there is no cash value, and loans are not permitted. Policyholders may borrow the full amount of cash value for both whole life and universal life policies, since the premiums are invested in the general account.

Which type of life insurance policy could have a negative rate of return for the year?

Variable universal life The purchaser of a variable universal life insurance policy assumes the investment risk. If the separate account funding the policy performs poorly, the rate of return may be less than expected or even negative. Term life has no rate of return, since it has no investment feature. Whole life is permanent insurance that invests premiums in the general account and builds cash value at a guaranteed minimum rate of return. Universal life provides a rate of return based on the insurer's general account, which consists of mostly fixed-rate securities. The rate of return may vary from year to year, but it will not drop below a minimum guaranteed level.

A customer holds a variable life contract and wishes to exercise her conversion privilege. Under this option, into which of the following can the customer convert the life contract within the first 24 months?

Whole life contract Remember that a variable life contract is really a derivative of a whole life policy, with the principal difference being that premiums for a whole life policy are invested in the general account, while premiums for a variable life policy are invested in a separate account. Whole life has fixed premiums, offers a fixed guaranteed death benefit, and builds cash value at a guaranteed rate. Universal life combines elements of term life and whole life policies. The premium is broken down into an insurance element (the term component) and a savings element that is invested in the insurance company's general account (savings component). With a universal life insurance policy, the policy owner can change the schedule of premium payments. After the cash value increases, the owner can skip a premium payment or the policy owner can use the cash value to buy additional insurance. The cash value is not invested in equities, but is invested in the insurer's general account. During the first 24 months of a variable life contract, the holder can change his or her mind and convert the variable life policy to a whole life policy without penalty.

Variable life policy holders must receive the financial statements of the separate account at least:

semi-annually The SEC requires that investment companies send semi-annual financial statements to shareholders (or separate account unit holders). Each policy funded by a separate account must meet the SEC reporting requirements for investment companies. Insurance companies must provide an annual statement of death benefit to policyholders, detailing all earnings and charges for that year.