3.2 Variable and Variable Universal Life

Variable and Variable Universal Life

Variable life (VL) and variable universal life (VUL) move the investment risk from the insurer to the policyowner. Instead of crediting a declared interest rate, these policies invest the cash value in separate-account subaccounts that function like mutual funds (stock, bond, money-market, balanced). Cash value and, in variable contracts, the death benefit rise and fall with subaccount performance. Because returns are not guaranteed, these are securities products.

Dual regulation (a heavily tested point)

Variable products are regulated by both the state insurance department (it is still life insurance) and the federal Securities and Exchange Commission / FINRA (the separate account is a security). To sell a variable contract a producer must hold:

• A life insurance license issued by the state, AND
• A FINRA registration (passing the SIE plus Series 6 or Series 7) and registration with a broker-dealer.

The prospect must receive a prospectus before or at the time of solicitation. Sales material must not be misleading and may not project guaranteed returns on the variable portion.

Separate account vs. general account

Variable life vs. variable universal life

• Variable life (VL/VWL) - fixed, scheduled premiums (like whole life) but cash value invested in subaccounts. Usually carries a guaranteed minimum death benefit that cannot fall below the original face even if subaccounts perform poorly; the death benefit can rise above that floor with good performance.
• Variable universal life (VUL) - combines UL's flexible premiums and adjustable death benefit with VL's subaccount investing. It generally has no guaranteed minimum cash value and often no guaranteed death benefit floor, so it can lapse if subaccounts fall and premiums stop.

Worked numeric: subaccount performance and death benefit

A variable life policy has a guaranteed minimum death benefit of $100,000. Strong subaccount returns push the variable death benefit to $128,000 in year 10. The beneficiary would receive $128,000 because performance lifted the benefit above the floor. If instead a market downturn dragged the calculated benefit to $92,000, the beneficiary still receives the $100,000 guaranteed minimum - the floor protects the death benefit but not the cash value.

Free look and contract exchanges

Variable contracts carry an extended free-look right (often the longer of the state period or 45 days from the application under SEC rules). During this window the owner may return the policy and receive a refund tied to the current cash value plus deducted charges - not necessarily the full premium - because the money was invested.

Common exam traps

• A producer who is state-licensed but not FINRA-registered may NOT sell or even recommend a variable contract.
• The prospectus - not the policy illustration - is the required disclosure document for the variable portion.
• VUL is the policy that can both lapse (UL feature) and lose value (variable feature); it carries the most policyowner risk.
• The guaranteed minimum death benefit in VL applies to the death benefit floor, NOT to cash value - cash value can fall to zero.
• Subaccount transfers among funds inside the policy are generally tax-free; they are not taxable exchanges.

Suitability and conduct rules

Because variable contracts are securities, the producer is also subject to FINRA suitability standards and the broker-dealer's supervision. The recommendation must fit the client's investment objectives, risk tolerance, time horizon, and financial situation - not just insurance need. Misrepresenting a variable product as a guaranteed or fixed-return savings vehicle is a serious violation that exposes the producer to both insurance-department discipline and FINRA/SEC sanctions. Replacing an existing variable contract triggers heightened disclosure because the new policy restarts surrender charges and may not be in the client's interest.

Fees that drag on returns

Variable policies carry layered charges the candidate should be able to name: mortality and expense (M&E) risk charges, administrative fees, fund management fees inside each subaccount, and any rider charges. These reduce net investment return, so a subaccount earning 8% gross may credit materially less after fees. This fee load is one reason regulators require prospectus delivery - the prospectus discloses the full expense structure that a simple illustration would hide.

Worked numeric - cash value with subaccount loss

A VUL has $60,000 in subaccounts at the start of the year. The owner pays $0 premium (flexible). Subaccounts fall 12% (a $7,200 loss), and monthly COI plus M&E charges total $2,400. Ending cash value = $60,000 - $7,200 - $2,400 = $50,400. Unlike fixed UL with a guaranteed floor, the market loss is fully absorbed by the owner, illustrating why VUL carries the greatest downside risk among permanent policies.

Policy Loans and Surrenders in VUL

A key VUL feature is flexible access to cash value through loans and partial surrenders, but both reduce the death benefit and can cause a lapse if the remaining account value cannot cover monthly charges. Because the account is invested, a market drop combined with outstanding loans can erode the policy faster than in a fixed UL — a risk the exam expects you to flag.

Trap: a VUL "guarantees" only what any guaranteed-minimum-death-benefit rider promises; the base cash value carries full market risk borne by the policyowner.

Suitability and the Prospectus

Because VUL is a security, the producer must deliver a prospectus, follow FINRA suitability, and confirm the buyer can tolerate investment loss and has a long time horizon. VUL suits a buyer who wants permanent coverage plus investment control and can fund the policy adequately. It is unsuitable for someone needing guaranteed cash value or who cannot absorb a down market — a fixed UL or whole life fits them better.