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Fixed life insurance or annuities are contracts that offer guaranteed minimum or fixed benefits that are stated in the contract. Variable life insurance or annuities are contracts in which the cash values accumulate based upon a specific portfolio of stocks without guarantees of performance. Variable annuities keep pace with inflation, and are determined by the value of securities backing it.
Variable life insurance (sometimes referred to as variable whole life insurance) is a level, fixed premium, investment-based product. Like traditional forms of life insurance, these policies have fixed premiums and a guaranteed minimum death benefit. The cash value of the policy, however, is not guaranteed and fluctuates with the performance of the portfolio in which the premiums have been invested by the insurer. The policyowner bears the investment risk in variable contracts.
In variable contracts, the policyowner bears the investment risk (assets in a separate account).
Because the insurance company is not sustaining the investment risk of the contract, the underlying assets of the contract cannot be kept in the insurance company's general account. These assets must be held in a separate account, which invests in stocks, bonds, and other securities investment options. Any domestic insurer issuing variable contracts must establish one or more separate accounts. Each separate account must maintain assets with a value at least equal to the reserves and other contract liabilities. Assets in the separate account cannot be commingled with assets in the general account.
Variable universal life insurance is a type of insurance that combines many features of the whole life with the flexible premium of universal life and the investment component of variable life, making it a securities version of the universal life insurance.
Variable universal life insurance, like universal life itself, has the following features and characteristics:
Unlike universal life, most of the investment vehicles in variable universal life policies do not guarantee return.
Variable life insurance products are dually regulated by the State and Federal Government. Due to the element of investment risk, the federal government has declared that variable contracts are securities, and are thus regulated by the Securities and Exchange Commission (SEC), and the Financial Industry Regulatory Authority (FINRA). Variable life insurance is also regulated by the Insurance Department as an insurance product.
Agents selling variable life insurance products must:
| Adjustable Life | Universal Life | Variable Life | |
|---|---|---|---|
| Key Features | Can be Term or Whole Life; can convert from one to the other | Permanent insurance with renewable term protection component | Permanent insurance |
| Premium | Can be increased or decreased by policyowners | Flexible; minimum or target | Fixed (if Whole Life); flexible (if Universal Life) |
| Face Amount | Flexible; set by policyowner with proof of insurability | Flexible; set by policyowner with proof of insurability | Can increase or decrease to a stated minimum |
| Cash Value | Fixed rate of return; general account | Guaranteed at a minimum level; general account | Not guaranteed; separate account |
| Policy Loans | Can borrow cash value | Can borrow cash value | Can borrow cash value |
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