5.1 Variable Life and Variable Universal Life (securities regulation)

What Makes a Product "Variable"

A variable life product places the policyowner's cash value in separate account subaccounts that the owner directs into stocks, bonds, and money-market funds. The insurer does not guarantee the investment results.

Because the owner bears the investment risk, variable products are legally securities as well as insurance. This dual nature drives the entire regulatory scheme on the exam.

Separate Account vs. General Account

The general account holds reserves for guaranteed (fixed) products such as whole life; the insurer bears the risk and pays a guaranteed minimum. The separate account holds variable funds, is kept apart from creditors of the general account, and passes gains and losses to the owner.

Variable Life Insurance (VLI)

Variable life insurance is permanent insurance with a fixed, level premium (like whole life) but cash value invested in subaccounts. It carries a guaranteed minimum death benefit (a floor) that cannot fall below the face amount, while the actual death benefit and cash value rise or fall with investment performance.

Key point: the premium is fixed, the death benefit has a floor, but the cash value is never guaranteed and can reach zero.

Variable Universal Life (VUL)

Variable universal life merges the flexible premium of universal life with the subaccount investing of variable life. It is the most flexible permanent product and usually the riskiest: most VUL policies have no guaranteed minimum death benefit.

If subaccounts perform poorly, both cash value and death benefit can erode, and the owner may have to pay higher premiums to keep the policy in force. There is no insurer-guaranteed floor as in straight variable life.

Securities Regulation: Who Regulates What

Variable products are dually regulated:

• Securities and Exchange Commission (SEC) — the variable contract is a security registered under the Securities Act of 1933; the separate account is an investment company under the Investment Company Act of 1940.
• Financial Industry Regulatory Authority (FINRA) — oversees the broker-dealer, sales practices, and advertising.
• State insurance department — regulates the insurance features and licenses the producer.

The producer must hold both a state life insurance license and a FINRA securities registration (a Series 6 or Series 7, with a Series 63 in many states).

The Prospectus Rule (Heavily Tested)

Because the contract is a security, the prospect must receive a prospectus no later than at the time of solicitation — i.e., before or at the point the sale is solicited, not after delivery. The prospectus discloses subaccount objectives, fees, and risks.

Trap: Choices that say the prospectus is delivered "at policy delivery" or "after the free-look" are wrong. For securities, disclosure comes up front.

Advertising for variable products must also be filed with and approved by FINRA, not merely the state.

Producer Licensing Requirements

To solicit variable products, a producer must satisfy three layers:

• A state life insurance license (the insurance side).
• A FINRA securities registration — a Series 6 (variable products and mutual funds) or Series 7 (general securities).
• A state securities registration, commonly the Series 63, in states that require it.

Selling a variable policy with only a life license is an unauthorized securities transaction and a serious regulatory violation. The exam often pairs a fixed-product fact pattern (life license only) against a variable one (dual credential required) to test this distinction.

Subaccounts, Fees, and the Free Look

Within the separate account the owner allocates premium among subaccounts resembling mutual funds, and may transfer (re-allocate) among them, sometimes with a limited number of free transfers per year. Charges include mortality and expense (M&E) risk charges, administrative fees, and underlying fund management fees — all disclosed in the prospectus.

Variable contracts carry an enhanced free-look: during the period the owner may return the policy, and many contracts guarantee return of premiums paid (not just account value) if cancelled early, shielding the buyer from initial market loss.

Scenario: Risk Ownership

Maria buys a VUL with a $250,000 face amount and directs 100% of cash value into an aggressive equity subaccount. A bear market cuts the subaccounts 40%.

Because VUL typically has no guaranteed floor, Maria's cash value drops sharply and the policy may approach lapse; she must inject premium to restore it. Had she bought straight variable life, the $250,000 death benefit floor would still protect beneficiaries even though cash value fell. This contrast is a classic exam distinction.