3.2 Variable and Variable Universal Life

Variable and Variable Universal Life

Variable life (VL) and variable universal life (VUL) move investment risk from the insurer to the policyowner. Instead of a fixed declared rate, premiums (net of charges) are allocated to separate account subaccounts — mutual-fund-like portfolios of stocks, bonds, and money-market instruments. Cash value and, in many designs, the death benefit rise and fall with subaccount performance. Because the owner bears market risk, these are classified as securities as well as insurance.

Dual regulation and licensing (heavily tested)

Variable products are regulated by both the state insurance department and federal securities authorities (the SEC under the Investment Company Act of 1940 and the Securities Act of 1933) plus FINRA. To sell them a producer must hold:

1. A life insurance license from the state, AND
2. A FINRA securities registration (typically Series 6 or Series 7) plus, in most states, a Series 63.

The buyer must receive a prospectus before or at the time of sale. A producer with only a life license cannot solicit variable contracts.

Separate account vs. general account

The separate account is not part of the insurer's general assets and is shielded from the insurer's other creditors.

Variable life vs. variable universal life

• Variable life (VL): Fixed, scheduled premiums (like whole life) but variable cash value/death benefit. There is usually a guaranteed minimum death benefit that cannot fall below the original face amount even if subaccounts perform poorly; gains can push the benefit higher.
• Variable universal life (VUL): Combines UL's flexible premiums with VL's separate-account investing. Greatest flexibility, but typically no guaranteed minimum death benefit beyond what cash value supports — poor performance plus low premiums can lapse the contract.

Mnemonic: VL = fixed premium + floor benefit; VUL = flexible premium + market risk, no floor.

Worked example: subaccount valuation

An owner allocates $6,000 of net premium across subaccounts priced at $30 per unit, buying $6,000 ÷ $30 = 200 units. A year later the unit value rises to $34.50.

• Account value = 200 × $34.50 = $6,900 (a $900 gain).

If instead units fell to $25.50, account value = 200 × $25.50 = $5,100 — a $900 loss the owner absorbs. The insurer makes no promise about unit value; that market exposure is exactly why a securities license and prospectus delivery are required.

Conservative trap points

• Loans: Owners may borrow against cash value, but borrowed funds leave the subaccounts and stop participating in market gains.
• Free-look / exchange right: Variable contracts carry an extended right to exchange or surrender during the early period; SEC rules require disclosure.
• Fixed account option: Most VUL contracts let the owner park a portion in a fixed (general) account for a guaranteed rate — choosing it shifts that slice back to insurer-borne risk.
• A producer who promises a specific subaccount return commits a prohibited sales practice.

Why variable products need a prospectus

Because separate-account values fluctuate with securities markets, variable life and VUL are securities as well as insurance. Federal law requires the producer to deliver a prospectus before or at the time of sale — a disclosure document describing the subaccounts, fees, and risks. Sales literature must not promise or imply guaranteed market returns.

The producer must hold both a state life insurance license and a FINRA securities registration (typically Series 6 or 7) plus a Series 63 where required, and must work through a broker-dealer. Recommendations must meet FINRA suitability and the firm's supervision rules in addition to state insurance suitability. Selling a variable product without the securities registration is a serious violation tested on nearly every exam.

Guaranteed minimum death benefit and contrast with fixed UL

Even though subaccount performance drives cash value, most variable life policies carry a guaranteed minimum death benefit so the face amount cannot fall below the original guarantee as long as scheduled premiums are paid. VUL, with its flexible premium, may instead offer an optional no-lapse guarantee rider.

Contrast the risk-bearer across the UL family: in fixed UL the insurer guarantees a minimum interest rate and bears more risk; in IUL the insurer caps the upside but guarantees a 0% floor; in VUL the policyowner bears full investment risk with no floor on subaccounts. Ranking these by owner risk — fixed UL (lowest) < IUL < VUL (highest) — is a frequent comparison item, and it explains why only VUL/VL require securities licensing.

Worked example: comparing risk allocation

Suppose three buyers each pay $5,000 of net premium and the chosen index/market returns −10% one year. In a fixed UL, the insurer credits the guaranteed minimum (say 2%), so cash value still grows. In an IUL, the 0% floor applies — no index loss is credited, though policy charges still apply. In a VUL, the subaccounts can actually lose value, so cash value falls by roughly the market decline plus charges. The owner who cannot stomach that loss is mismatched to VUL. This single fact pattern, varying the product, is the most efficient way the exam tests who bears investment risk.