FINRA Series 7Investment Information and Suitable RecommendationsEasy
A client owns a variable life insurance policy. Which of the following statements regarding the policy's cash value is MOST accurate?
- AThe cash value is always equal to the policy's face amount.
- BThe cash value fluctuates based on the performance of the separate account.
- CThe cash value can only be accessed upon the death of the insured.
- DThe cash value is guaranteed to grow at a fixed rate.
Show answer & explanationAnswer & explanation
Correct answer: B. The cash value fluctuates based on the performance of the separate account.
Variable life insurance policies invest their cash value in a separate account, which consists of various investment sub-accounts. The cash value's growth and value are directly tied to the performance of these underlying investments, meaning it can fluctuate.
Why the other options are wrong
- A. Incorrect. The cash value is typically much lower than the face amount, especially in earlier years, and can fluctuate.
- C. Incorrect. Cash value can be accessed through loans or withdrawals during the insured's lifetime.
- D. Incorrect. This describes whole life insurance, not variable life.
Variable Life Insurance Cash Value
The cash value of a variable life insurance policy is held in a separate account and fluctuates based on the performance of the underlying investment options chosen by the policyholder.
- Tied to separate account performance (no guarantees).
- Policyholder chooses investment sub-accounts.
- Can be accessed via loans or withdrawals.
- Offers potential for greater cash value growth but also investment risk.
Memory trick: Variable Life: Values Vary with Investments, Vital for protection.