FINRA Series 6 Investment Company and Variable Contracts Products Representative ExaminationRegulatory Fundamentals and General Product KnowledgeHard
A client asks a registered representative about the differences between 'participating' and 'non-participating' separate accounts in variable life insurance. Which of the following statements accurately describes a 'participating' separate account?
- AA participating separate account guarantees a minimum interest rate for cash value growth.
- BA participating separate account allows the policyholder to directly manage the underlying investments.
- CInvestment gains in a participating separate account are shared between the policyholder and the insurance company.
- DThe term 'participating' refers to the policyholder's ability to share in the separate account's investment performance through the subaccounts they choose.
Show answer & explanationAnswer & explanation
Correct answer: D. The term 'participating' refers to the policyholder's ability to share in the separate account's investment performance through the subaccounts they choose.
In the context of variable life insurance, a 'participating' separate account refers to the policyholder's ability to participate directly in the investment performance of the underlying subaccounts they select. This means the cash value and death benefit will fluctuate with these investment results.
Why the other options are wrong
- A. Guaranteed minimum interest rates are not a feature of variable products, as investment risk is borne by the policyholder.
- B. Policyholders select subaccounts, but they do not directly manage the underlying investments within those subaccounts.
- C. While the insurance company charges fees (M&E, admin), the concept of 'sharing' investment gains with the company as described here is not how a participating separate account works. The policyholder gets the direct investment performance, minus fees.
Participating Separate Account (Variable Life)
A separate account in variable life insurance where the policyholder 'participates' in or bears the investment risk and reward of the underlying subaccounts they select.
- Policyholder bears investment risk
- Cash value/death benefit fluctuate with subaccounts
- Choice of subaccounts by policyholder
- Distinguishes from fixed products
Memory trick: Participating: 'You participate' in the 'subaccount's' market 'fate'.