FINRA Series 7Investment Information and Suitable RecommendationsHard
A 40-year-old client purchases a variable life insurance policy. Which of the following statements about the policy's death benefit and cash value is TRUE?
- ABoth the death benefit and cash value are guaranteed regardless of separate account performance
- BNeither the death benefit nor the cash value offer any guarantees
- CThe death benefit has a guaranteed minimum, but the cash value is not guaranteed and fluctuates with separate account performance
- DThe cash value is guaranteed, but the death benefit fluctuates with separate account performance
Show answer & explanationAnswer & explanation
Correct answer: C. The death benefit has a guaranteed minimum, but the cash value is not guaranteed and fluctuates with separate account performance
Variable life insurance policies guarantee a minimum death benefit regardless of investment performance, but the cash value is not guaranteed — it fluctuates based on the performance of the underlying separate account investments chosen by the policyowner.
Why the other options are wrong
- A. Cash value is never guaranteed in a variable life policy since it depends on separate account performance.
- B. The death benefit does carry a guaranteed minimum in a standard variable life policy.
- D. This reverses the actual guarantee structure of variable life insurance.
Variable Life Insurance Guarantees
Variable life insurance guarantees a minimum death benefit, but cash value is not guaranteed and varies with the performance of investments held in the separate account.
- Minimum death benefit is guaranteed
- Cash value fluctuates with separate account performance
- Policyowner bears investment risk on cash value
Memory trick: 'Death benefit has a floor, but cash value can soar or sink.'