Variable Life cheat sheet

State insurance departments enforce the Insurance Code; the NAIC drafts model regulations but has no direct enforcement authority.

A person must hold a state life insurance producer license to solicit, negotiate, or sell variable life insurance; a securities license alone is insufficient.

Variable life sales require dual licensing: a state life insurance producer license plus a FINRA securities registration (typically Series 6 or Series 7) held through a member firm.

Continuing education for life producers is commonly 24 credit hours per 2-year license term, including a state-mandated ethics component; exact hours vary by state.

A producer must notify the state of a change of address, and insurers must report producer appointments and terminations within state-specified timeframes.

Commissions may only be paid to licensed, appointed producers; paying a commission to an unlicensed person is a prohibited rebate.

Rebating-offering any part of a premium or commission as an inducement-is prohibited in most states; exceptions exist only where state law expressly permits.

State guaranty associations cover policyholder claims up to statutory limits if an insurer becomes insolvent; they do not cover variable subaccount losses, which are securities risk.

Insurable interest must exist at policy issue; it need not continue afterward unless state law says otherwise.

Pure risk is insurable (loss or no loss); speculative risk (loss or gain, as in securities) is generally uninsurable.

Indemnity principle: insurance restores the insured to the pre-loss financial position, not to a profit.

Adverse selection is the tendency of higher-risk individuals to seek coverage; underwriting and exclusions control it.

Utmost good faith requires both parties to disclose material facts; concealment or material misrepresentation can void the contract.

Contract characteristics: adhesion (insurer drafts terms), unilateral (only insurer makes an enforceable promise), and aleatory (unequal exchange of value).

Level premium whole life builds cash value because early premiums exceed the cost of protection; term insurance has no cash value.

A policy is contestable for material misrepresentation during the contestable period (commonly 2 years) from issue.

Variable life is permanent insurance with a fixed premium and a guaranteed minimum death benefit; cash value varies with separate-account performance.

Variable universal life (VUL) combines flexible premiums and an adjustable death benefit with cash value invested in separate-account subaccounts.

Free-look period (commonly 10–30 days depending on state and policy type) allows the owner to return the policy for a full refund.

Incontestability clause bars the insurer from contesting the policy for misrepresentation after the stated period, except for nonpayment of premium.

Grace period (commonly 31 days) keeps coverage in force after a missed premium; the premium may be deducted from cash value.

Misstatement of age or sex results in an adjustment of benefits to what the premium would have purchased at the correct age or sex.

Policy loans accrue interest, reduce cash value and death benefit if unpaid, and may cause lapse; withdrawals from VUL reduce the death benefit dollar-for-dollar.

Suicide clause limits payment to a return of premiums during the stated period (commonly 2 years); reinstatement requires evidence of insurability and payment of overdue premiums.

Variable life premiums are allocated to subaccounts of the insurer's separate account; the general account does not back subaccount values.

The separate account is registered as an investment company under the Investment Company Act of 1940; the policy itself is registered under the Securities Act of 1933.

The owner bears investment risk; no guaranteed minimum cash value exists, though a minimum death benefit may be guaranteed.

Cash value = number of accumulation units × unit value; unit value changes with subaccount performance net of fees.

Fees include mortality and expense risk charges, administrative fees, cost of insurance, fund expense ratios, and surrender charges.

A variable death benefit may be either fixed (guaranteed minimum) or variable, depending on policy design and subaccount performance.

Variable life is a security: sales require a prospectus delivery and are subject to FINRA supervision.

A separate account may be excluded from registration if used solely to fund variable life and variable annuity contracts, but it remains subject to state insurance regulation.

Accumulation phase builds value; annuitization phase converts value into periodic income.

Fixed annuity: insurer guarantees principal and a stated rate; variable annuity: value fluctuates with separate-account subaccounts.

Accumulation units measure interest during accumulation; annuity units measure income during payout.

Variable annuity payout amount depends on the assumed interest rate (AIR), number of annuity units, and unit value; a higher AIR produces a lower initial payment but more potential for increases.

A variable annuity is a security registered under the 1933 Act; the separate account is registered under the 1940 Act; sales require a prospectus and a securities license.

Surrender charges typically decline over a surrender-charge period (often 7 years); free withdrawal amounts (commonly 10% per year) may be available.

Annuity contracts are excluded from the 3.8% net investment income tax, but gains are taxed as ordinary income when withdrawn.

Variable annuities may offer guaranteed living benefits (GLWB, GMIB) for an additional fee; these riders are part of the registered contract.

Securities Act of 1933: requires registration of variable life and variable annuity contracts and delivery of a prospectus.

Securities Exchange Act of 1934: governs secondary trading and created the SEC; FINRA rules apply to broker-dealers selling variable products.

Investment Company Act of 1940: regulates the separate account as an investment company; Investment Advisers Act of 1940 regulates advisers for a fee.

FINRA Rule 2210 governs communications with the public: retail communications require principal approval and generally must be filed with FINRA.

FINRA Rule 2330 imposes enhanced suitability, disclosure, and supervision requirements for deferred variable annuity purchases, exchanges, and replacements.

FINRA Rule 2111 (suitability) requires reasonable basis, customer-specific, and quantitative suitability; Rule 2020 prohibits manipulative devices.

Suitability for variable products requires knowing the customer's financial situation, objectives, risk tolerance, time horizon, and existing holdings.

Exchanging a variable annuity or life policy triggers replacement rules and requires comparison of surrender charges, new surrender periods, and benefits.

Death benefits paid to a named beneficiary are generally income-tax-free under IRC §101(a); the estate tax may still apply if the insured owns the policy at death.

Cash value grows tax-deferred; policy loans are generally not taxable while the policy remains in force, but lapse or surrender with an outstanding loan can create taxable gain.

Premiums for personal life insurance are not deductible; employer premiums are deductible as business expense, and group term coverage over $50,000 creates imputed income.

Modified endowment contracts (MECs) fail the 7-pay test; distributions are taxed LIFO (gains first) and pre-59½ withdrawals may incur a 10% penalty.

Annuity accumulation is tax-deferred; withdrawals before annuitization are taxed LIFO until basis is recovered.

Annuity payments after annuitization are taxed using the exclusion ratio: investment in the contract ÷ expected return, applied to each payment.

Premature annuity withdrawals before age 59½ may incur a 10% federal penalty tax, with exceptions such as death, disability, and substantially equal periodic payments.

A §1035 exchange allows tax-free transfer of a life policy or annuity into a like-kind contract; basis carries over to the new contract.

Recommendations must be suitable for the specific customer; the producer must gather and document financial and nonfinancial information.

Twisting is misrepresenting an existing policy to induce replacement; churning is excessive replacement or switching to generate commissions-both are prohibited.

Replacement requires disclosure to the applicant and the existing insurer, and comparison of benefits, costs, and surrender charges.

Illustrations must be clearly labeled as hypothetical and not projections of actual results; guaranteed and nonguaranteed elements must be shown separately.

Advertising and sales materials for variable products are retail communications subject to FINRA review and principal approval.

Producers must not sign a customer's name or falsify an application; signatures must be genuine and the applicant must attest to answers.

Privacy rules (Gramm-Leach-Bliley Act and Regulation S-P) require notice and safeguards for nonpublic personal financial information.

Commissions and conflicts must be disclosed where required; compensation may not be used to justify an unsuitable recommendation.