Life & Health Insurance Exam (National Portion)General InsuranceMedium
An insurance company has established a separate account to hold funds for its variable life insurance products. This structure allows policyowners to direct the investment of their premiums into various sub-accounts, such as stocks and bonds. Which characteristic best describes this type of insurance company?
- AIt is classified as a stock insurance company.
- BIt is authorized to offer variable products.
- CIt is offering participating policies.
- DIt is operating as a fraternal benefit society.
Show answer & explanationAnswer & explanation
Correct answer: B. It is authorized to offer variable products.
Variable products, such as variable life insurance, require the insurer to establish a separate account for investment and typically necessitate specific authorization or licensing, often involving both state insurance departments and the SEC, due to their investment component.
Why the other options are wrong
- A. A stock company is defined by ownership (shareholders), not specifically by offering variable products, though they can.
- C. Participating policies pay dividends to policyholders, which is distinct from the separate account structure of variable products.
- D. Fraternal benefit societies are non-profit organizations with a lodge system, not defined by their investment accounts.
Variable Products
Variable life insurance and variable annuities are products where the policyowner bears the investment risk, and the cash value or death benefit fluctuates based on the performance of a separate account.
- Policyowner directs investments in sub-accounts.
- Cash value and death benefit are not guaranteed.
- Requires dual regulation by state insurance departments and the SEC.
Memory trick: Variable means separate accounts and investment plays.