Variable Life Insurance

Variable life insurance combines permanent life insurance protection with the investment characteristics of variable annuities. Like variable annuities, these policies invest in separate accounts and require both insurance and securities licenses to sell.

What Is Variable Life Insurance?

Variable life insurance is permanent life insurance where:

• Cash value is invested in separate account subaccounts
• Cash value and death benefit vary based on investment performance
• Policy owner bears the investment risk
• Minimum death benefit is typically guaranteed

Key Point: Variable life combines a death benefit with investment options, making it both an insurance product AND a security.

Types of Variable Life Insurance

Variable Life (VL) - Scheduled Premium

• Premiums are fixed and mandatory
• If premiums aren't paid, policy may lapse
• Guaranteed minimum death benefit regardless of investment performance

Variable Universal Life (VUL) - Flexible Premium

• Combines variable life with universal life flexibility
• Can adjust premiums and death benefit
• More popular than scheduled premium variable life
• Policy can lapse if cash value depleted

VUL is the most common form of variable life insurance tested on the Series 6 exam.

How Variable Life Works

Separate Account Investment

Like variable annuities, variable life uses a separate account:

• Multiple subaccount options (equity, bond, money market, etc.)
• Policy owner selects allocation
• Can transfer between subaccounts
• Performance determines cash value growth

Cash Value

The cash value in variable life:

• Builds tax-deferred
• Can be borrowed against
• Can be surrendered for its value
• Is NOT guaranteed (can decrease with poor performance)

Death Benefit

Variable life death benefits typically have two components:

Example: Policy has $500,000 guaranteed minimum death benefit. Strong investment performance increases total death benefit to $650,000. Poor performance brings it back to $500,000 minimum.

Comparison: Variable Life vs. Other Life Insurance

Policy Loans

Variable life policies allow loans against cash value:

Loan characteristics:

• Borrow up to a percentage of cash value (often 90%)
• Interest charged on loan balance
• No credit check required
• Outstanding loans reduce death benefit
• If loan + interest exceeds cash value, policy may lapse

Tax Treatment: Policy loans are generally NOT taxable events (unless the policy is a MEC or lapses with outstanding loan).

Surrender Options

Policy owners can surrender variable life for:

• Full surrender - Receive entire cash value (minus surrender charges and loans)
• Partial surrender - Reduce death benefit, receive portion of cash value
• Paid-up insurance - Use cash value to buy smaller paid-up policy

Key Advantages of Variable Life

1. Permanent Protection - Coverage for life (if premiums maintained)
2. Tax-Advantaged Growth - Cash value grows tax-deferred
3. Investment Potential - Opportunity for higher returns than whole life
4. Tax-Free Death Benefit - Generally income tax-free to beneficiaries
5. Living Benefits - Cash value access through loans/withdrawals

Key Disadvantages of Variable Life

1. Investment Risk - Cash value can decrease
2. Higher Costs - M&E charges, subaccount fees, policy charges
3. Complexity - Many moving parts to understand
4. Policy Lapse Risk - VUL can lapse if cash value depleted
5. Requires Dual Licensing - More difficult to sell

VUL Premium Flexibility

Variable Universal Life offers unique flexibility:

Warning: Underfunding a VUL can lead to policy lapse if investment performance is poor and cash value is exhausted.

Death Benefit Options (VUL)

Example: $500,000 policy with $100,000 cash value

• Option A death benefit = $500,000
• Option B death benefit = $600,000

Dual Registration Requirement

Variable life insurance requires:

• State insurance license - Variable products endorsement
• Securities license - Series 6 (or Series 7)
• Firm registration - Broker-dealer with insurance authority

Key Exam Points

1. Variable life is a security - Requires securities registration
2. Cash value is NOT guaranteed - Fluctuates with separate account
3. Death benefit has a guaranteed minimum - Won't fall below face amount
4. VUL has flexible premiums - Unlike scheduled premium variable life
5. Policy loans are generally tax-free - Unless MEC or policy lapses
6. Option B = Face + Cash Value - Higher death benefit, higher cost