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The Securities and Exchange Commission (SEC) regulates securities transactions, which include the trading of stocks, bonds, and variable insurance products. The Financial Industry Regulatory Authority (FINRA) is the entity that oversees securities firms in the United States. This regulatory body governs securities activities, administers securities exams, and issues licenses. Therefore, producers who want to sell variable products must hold both a life insurance license and a securities license.
Variable life insurance (VL) combines life insurance protection with investment opportunities in securities, such as stocks and bonds. It features fixed premiums and a guaranteed minimum death benefit. After deducting the cost of protection, the balance of the premium is placed in a separate account, where the owner chooses from a family of pooled investments resembling mutual funds, consisting of stocks, bonds, or money market funds selected by the policyowner. The owner may change the mix of funds at any time.
While the death benefit is guaranteed, the cash value may fluctuate with market performance. The policy owner, not the insurer, assumes all investment risk. Unlike traditional life insurance, VL doesn't guarantee interest rates or minimum cash values, but it offers the potential for higher investment returns through separate account options.
The cash value and death benefit can increase with good investment performance but may also decline with poor performance. There is always a guaranteed minimum death benefit, but all of the cash value is at risk of total loss. To sell VL insurance, agents must have both a state life insurance license and a FINRA securities license.
Although VL policies involve investment management, they remain primarily life insurance products designed to provide financial protection upon the policyholder's death.
Variable universal life (VUL) insurance policies combine elements of variable whole life insurance and universal life insurance. A VUL's death benefit is designed like a regular universal life policy's death benefit in that it may not be guaranteed because the death benefit depends on there being sufficient cash value. A VUL's cash value is structured like a variable life insurance policy in that the amount of cash value in the policy depends on the performance of the chosen investments. Policy owners have complete control over both the flexible premiums (as in universal life) and the investment of the cash value (as in variable life).
| Policy | Death Benefit | Premium | Cash Value | Policy Loans | Partial Withdrawals of Cash Value | Surrender Charges |
|---|---|---|---|---|---|---|
| Variable Life | Guaranteed minimum but may increase based on investment performance. | Fixed, level, or predetermined. A security (i.e., investment) and insurance plan with a fixed premium. | May increase or decrease based on investment performance, tax deferred. Owner control of CV investment. | YES | NO. To receive cash, it must be borrowed. | YES |
| Variable Universal Life | No guaranteed minimum — death benefit depends on investment performance. | Flexible premium. Required first year target (suggested level premium). A securities and insurance plan with a flexible premium. | Depends on investment performance, tax deferred. Policy owner controls CV investment. | YES | YES | YES |