FINRA Series 6 Investment Company and Variable Contracts Products Representative ExaminationRegulatory Fundamentals and General Product KnowledgeMedium
A client is considering investing in a variable life insurance policy. Which of the following statements regarding the separate account of a variable life policy is TRUE?
- AThe policyholder has no control over the investment allocation within the separate account.
- BInvestment returns in the separate account are directly tied to the performance of the underlying subaccounts selected by the policyholder.
- CThe assets in the separate account are subject to the claims of the insurance company's general creditors.
- DThe separate account's performance is guaranteed by the insurance company.
Show answer & explanationAnswer & explanation
Correct answer: B. Investment returns in the separate account are directly tied to the performance of the underlying subaccounts selected by the policyholder.
In a variable life insurance policy, the separate account's value and the cash value of the policy fluctuate directly with the investment performance of the underlying subaccounts chosen by the policyholder. This means the policyholder bears the investment risk.
Why the other options are wrong
- A. Policyholders typically have control over the investment allocation by choosing among various subaccounts offered within the separate account.
- C. Assets in a separate account are segregated from the insurance company's general assets and are generally NOT subject to claims of its general creditors, offering a layer of protection.
- D. The performance of the separate account is NOT guaranteed; the policyholder assumes the investment risk.
Variable Life Separate Account
A segregated account in a variable life insurance policy where policyholder premiums are invested, typically in subaccounts, and its performance directly impacts the policy's cash value and death benefit.
- Segregated from general account
- Policyholder assumes investment risk
- Value fluctuates with subaccount performance
- Not subject to general creditors
Memory trick: Separate account: 'Subaccount' success is 'your account' success.