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Variable Life study materials
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Variable Life practice questions

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Question 1Insurance Regulation and Licensing

Under the standard variable life insurance regulatory framework in the United States, which federal statute primarily governs the offer and sale of variable life policies as securities?

  1. The Securities Act of 1933 Correct answer.
  2. The National Association of Insurance Commissioners Model 270
  3. The McCarran-Ferguson Act
  4. The Employee Retirement Income Security Act of 1974

Explanation

Variable life policies are treated as securities because cash values are invested in separate account portfolios. The Securities Act of 1933 requires registration of those securities and governs their offer and sale. McCarran-Ferguson preserves state insurance regulation, and NAIC models are not federal statutes.

Question 2Insurance Regulation and Licensing

A producer wishes to sell variable life insurance in a state. Beyond the state insurance license, which credential is generally required to sell the separate account interest?

  1. A property and casualty license
  2. A certified public accountant license
  3. A third-party administrator registration
  4. A FINRA securities registration (typically Series 6 or Series 7) Correct answer.

Explanation

Because the separate account interest is a security, the producer must hold an appropriate securities registration in addition to the state insurance license. FINRA registration through a broker-dealer is the standard route. Accounting, P&C, and TPA credentials do not authorize securities sales.

Question 3Insurance Regulation and Licensing

Which entity is responsible for approving the initial form and content of a variable life policy before it is marketed in a state?

  1. The Federal Insurance Office
  2. The policyholder's employer
  3. The state insurance department Correct answer.
  4. The Securities and Exchange Commission

Explanation

Policy form approval is a state insurance regulatory function, exercised by the state insurance department under its insurance code. The SEC reviews securities filings such as the registration statement but does not approve insurance policy forms. The Federal Insurance Office has no form-approval authority.

Question 4Insurance Regulation and Licensing

A variable life producer moves to a new state and wants to continue selling there. What must the producer generally obtain before soliciting business in that state?

  1. A new SEC registration statement
  2. A nonresident or resident insurance license from that state Correct answer.
  3. An endorsement from the NAIC
  4. A federal insurance charter

Explanation

Insurance licensing is state-based, so a producer must hold a license in each state where business is solicited. Nonresident licensing is the common route when the home state license is in good standing. There is no federal insurance charter, and the NAIC does not license individuals.

Question 5Insurance Regulation and Licensing

Which document must be delivered to a prospective variable life purchaser before or at the time of application under SEC and FINRA rules?

  1. The producer's commission schedule
  2. The state insurance code
  3. The product prospectus Correct answer.
  4. The insurer's annual statement

Explanation

A prospectus describes the separate account, fees, and risks and must be delivered to the buyer at or before the time of sale. The insurer's annual statement, commission schedules, and the insurance code are not sale-time disclosure documents for the buyer.

Question 6Insurance Regulation and Licensing

Variable life insurance is regulated jointly by state insurance departments and federal securities regulators. Which statement best describes the division of authority?

  1. States regulate insurance features and solvency while the SEC and FINRA regulate the securities aspects Correct answer.
  2. The SEC regulates policy forms while states regulate securities sales
  3. Only state insurance departments regulate variable life
  4. Only the federal government regulates variable life

Explanation

Variable life sits at the intersection of insurance and securities law. States oversee insurance elements such as policy forms, reserves, and producer insurance licensing, while federal securities regulators oversee registration, disclosure, and sales practices. Neither regulator acts alone.

Question 7Insurance Regulation and Licensing

An insurer plans to use a new separate account subaccount investing in emerging market equities for a variable life product. Before offering it, the insurer must generally do which of the following?

  1. Obtain a federal insurance charter
  2. File the subaccount with the state banking department
  3. Register the separate account interest as a security and update the prospectus Correct answer.
  4. Receive approval from FINRA for the investment strategy

Explanation

New separate account interests are securities and require registration and updated prospectus disclosure describing the investment policy and risks. FINRA does not approve investment strategies, and no federal insurance charter or banking filing applies.

Question 8Insurance Regulation and Licensing

A producer tells a client that a variable life policy is 'approved by the SEC, so the investment returns are guaranteed.' How should a compliance reviewer characterize this statement?

  1. It is accurate because SEC approval implies safety
  2. It is misleading because SEC registration does not approve the merits or guarantee returns Correct answer.
  3. It is acceptable if disclosed in the prospectus
  4. It is permitted if the producer is FINRA registered

Explanation

SEC registration does not mean the SEC has approved the merits of the investment or guaranteed performance. Implying guaranteed returns misrepresents the product's risk. A FINRA registration or prospectus disclosure does not cure a false assurance of returns.

Question 9Insurance Regulation and Licensing

Which activity would require a state insurance producer license for variable life?

  1. Auditing the insurer's financial statements
  2. Preparing the insurer's actuarial reserve report
  3. Discussing specific policy features and taking an application for compensation Correct answer.
  4. Printing the policy prospectus

Explanation

Soliciting and negotiating insurance for compensation is the core licensed activity. Actuarial, audit, and printing functions do not involve selling, soliciting, or negotiating insurance and therefore do not require a producer license.

Question 10Insurance Regulation and Licensing

A registered representative is not insurance licensed but wants to refer variable life prospects to a licensed agent. Under typical state rules, which arrangement is appropriate?

  1. The unlicensed person may quote premiums but not deliver policies
  2. The unlicensed person may take applications if the insurer approves
  3. The unlicensed person may share in commissions if the agent supervises
  4. The unlicensed person may not solicit or share commissions on the insurance sale Correct answer.

Explanation

Sharing commissions or performing solicitation without an insurance license generally constitutes unlicensed activity, even with supervision or insurer approval. Referral arrangements must avoid compensation tied to the insurance sale unless the person is properly licensed.

Question 11Insurance Regulation and Licensing

Which best explains why state insurance departments require continuing education for variable life producers?

  1. To approve each policy form annually
  2. To set the investment returns of separate accounts
  3. To replace the FINRA qualification exam
  4. To ensure producers stay current on product, regulatory, and suitability requirements Correct answer.

Explanation

Continuing education keeps licensed producers informed about regulatory changes, product features, and suitability obligations. It does not substitute for FINRA qualification exams, influence investment returns, or serve as form-approval mechanism.

Question 12Insurance Regulation and Licensing

An insurer wants to replace its existing variable life policy form with a revised version. Under typical state requirements, what must occur before the revised form is used?

  1. The insurer must receive SEC approval of the insurance provisions
  2. The insurer must obtain voter approval
  3. The insurer may use it immediately without any filing
  4. The insurer must file the revised form with the state insurance department and obtain approval or acceptance as required Correct answer.

Explanation

Policy forms and revisions are filed with the state insurance department under filing or approval statutes before use. SEC review addresses securities disclosure, not insurance contract provisions, and there is no voter or automatic-use exception.

Question 13Insurance Regulation and Licensing

A producer who holds a life insurance license but not a securities registration sells a variable life policy. Which regulatory consequence is most likely?

  1. Disciplinary action by both insurance and securities regulators Correct answer.
  2. Only a warning from the insurer
  3. No consequence because the life license covers all life products
  4. Automatic conversion of the policy to whole life

Explanation

Selling a security without proper registration violates securities law and typically also breaches insurance conduct rules, exposing the producer to dual disciplinary action. A life license alone does not authorize variable product sales, and policies are not automatically converted.

Question 14Insurance Regulation and Licensing

Which statement about the role of the insurer's separate account in regulatory filings is correct?

  1. The separate account is registered as an investment company and its interests are offered through a prospectus Correct answer.
  2. The separate account must be approved by the policyholder before registration
  3. The separate account is regulated only by the state banking department
  4. The separate account is exempt from all securities filing requirements

Explanation

Variable life separate accounts are typically registered as investment companies under federal securities law, and interests are sold with a prospectus. They are not exempt from securities filing, not banking-regulated, and do not require policyholder approval to register.

Question 15Insurance Regulation and Licensing

A state insurance department discovers a producer used unapproved marketing materials that promised a minimum guaranteed cash value for a variable life policy. Which violation is most directly implicated?

  1. Use of misleading advertising and prohibited sales practices Correct answer.
  2. Failure to file a change of address
  3. Late payment of the producer's license renewal fee
  4. Failure to maintain a surety bond

Explanation

Promising guaranteed cash values for a variable product misrepresents the product and violates advertising and sales-practice rules. Bond, address, and renewal issues are administrative matters unrelated to misleading marketing claims.

Question 16Insurance Regulation and Licensing

A producer's license lapses for failure to complete required continuing education. What is the producer's status regarding new variable life sales?

  1. The producer may sell only to existing clients
  2. The producer must stop soliciting until the license is reinstated Correct answer.
  3. The producer may continue selling under the insurer's appointment
  4. The producer may sell if a FINRA registration remains active

Explanation

A lapsed insurance license removes authority to solicit insurance, and an active FINRA registration does not restore it. Selling under an appointment or only to existing clients while unlicensed is still unlicensed activity.

Question 17Insurance Regulation and Licensing

An insurer domiciled in State A issues a variable life policy to a resident of State B through a producer licensed only in State A. Which regulatory principle governs the transaction?

  1. The SEC issues a federal license covering all states
  2. State A's license is sufficient because the insurer is domiciled there
  3. The producer generally must be licensed in State B where the solicitation occurs Correct answer.
  4. The NAIC grants multistate selling authority

Explanation

Insurance licensing follows the location of the solicitation and the residence of the applicant, so the producer generally needs authority in State B. Domicile of the insurer and NAIC membership do not confer multistate selling rights, and no federal producer license exists.

Question 18Insurance Regulation and Licensing

A compliance officer is reviewing whether a variable life illustration complies with state rules. Which element is most likely to be scrutinized as a regulatory concern?

  1. Disclosure of separate account fees and charges
  2. A statement that values fluctuate with market performance
  3. Identification of the insurer and policy form number
  4. Use of guaranteed hypothetical returns that imply certainty of investment performance Correct answer.

Explanation

Illustrations may not present hypothetical returns as guaranteed or imply certainty, because that misleads buyers about non-guaranteed elements. Fee disclosure, fluctuation warnings, and proper identification are required or acceptable elements, not violations.

Question 19Insurance Regulation and Licensing

Which combination correctly pairs a regulatory body with its primary variable life oversight role?

  1. State insurance department - securities registration statements
  2. SEC - insurance policy form approval
  3. FINRA - broker-dealer sales conduct and supervision Correct answer.
  4. Federal Insurance Office - producer licensing

Explanation

FINRA oversees broker-dealer conduct and supervision of securities sales, including variable products. State departments approve policy forms, the SEC handles securities registration, and the Federal Insurance Office does not license producers.

Question 20Insurance Regulation and Licensing

A producer licensed in life insurance completes the required securities registration but never files the appointment with the insurer in the state. What is the most accurate regulatory statement?

  1. Appointment is only needed for health insurance products
  2. Appointment requirements are set by state law and the insurer, and selling without a required appointment may violate those rules Correct answer.
  3. Appointment is issued by FINRA on the producer's behalf
  4. Appointment is unnecessary once securities registration is obtained

Explanation

Many states require an insurer appointment before a producer may act for that insurer, and the requirement is separate from securities registration. FINRA does not issue insurance appointments, and appointment rules are not limited to health products.

Question 21Life Insurance Basics and General Insurance Concepts

Which party bears the investment risk associated with the separate account of a variable life insurance policy?

  1. The policyowner Correct answer.
  2. The state guaranty association
  3. The insurer's general account
  4. The reinsurer

Explanation

In variable life insurance the cash value is held in a separate account and invested in underlying subaccounts, so investment performance and the resulting fluctuation in cash value and death benefit fall on the policyowner. The insurer guarantees only a minimum death benefit floor, not the investment results.

Question 22Life Insurance Basics and General Insurance Concepts

A variable life policy is classified as a security as well as an insurance product primarily because the policyowner's cash value is invested in a separate account whose performance is not guaranteed by the insurer. Which regulator's registration is required before the policy may be sold?

  1. The Department of Labor
  2. The Federal Deposit Insurance Corporation
  3. The Securities and Exchange Commission, with sales made by registered representatives Correct answer.
  4. The state department of insurance only

Explanation

Because the separate account is an investment vehicle, variable life is a dual-regulated product: the SEC must register the separate account and the contract, and producers must hold both a state insurance license and a securities registration. State insurance departments regulate the insurance features but cannot authorize the sale alone.

Question 23Life Insurance Basics and General Insurance Concepts

Which statement correctly describes the death benefit guarantee in a typical variable life policy?

  1. The insurer guarantees a minimum death benefit floor, but the benefit may vary with investment performance above that floor Correct answer.
  2. The death benefit is fixed and cannot increase
  3. The death benefit equals the separate account value at the date of death
  4. The death benefit can never fall below the initial face amount regardless of investment results

Explanation

Variable life provides a guaranteed minimum death benefit, usually the initial face amount, while allowing the actual benefit to rise above that floor if separate account performance is favorable. The benefit may also decline with poor performance but cannot drop below the guarantee.

Question 24Life Insurance Basics and General Insurance Concepts

In a variable life insurance contract, which of the following is guaranteed by the insurer?

  1. The cash value of the separate account
  2. The expense charges and mortality cost schedule stated in the policy Correct answer.
  3. The investment return of each subaccount
  4. The net asset value of the underlying mutual fund shares

Explanation

The insurer guarantees the mortality and expense charges set out in the contract even though it cannot guarantee investment results. Cash value, subaccount returns, and net asset values all fluctuate and are borne by the policyowner.

Question 25Life Insurance Basics and General Insurance Concepts

Which license must a producer hold to solicit and sell a variable life insurance policy?

  1. A property and casualty license
  2. Both a state life insurance license and a securities registration Correct answer.
  3. A securities registration only
  4. A state life insurance license only

Explanation

Variable life is both an insurance contract and a security, so the producer must be licensed by the state insurance department and registered with a self-regulatory securities authority through a broker-dealer. Holding only one of the two credentials makes the sale unlawful.

Question 26Life Insurance Basics and General Insurance Concepts

Which type of life insurance allows the policyowner to direct cash value into a choice of investment subaccounts?

  1. Universal life insurance with a fixed interest rate
  2. Term life insurance
  3. Traditional whole life insurance
  4. Variable life insurance Correct answer.

Explanation

Variable life is the design in which the policyowner selects among separate account subaccounts, and cash value and death benefit vary with their performance. Whole life and fixed universal life credit interest in the insurer's general account, and term insurance has no cash value.

Question 27Life Insurance Basics and General Insurance Concepts

A policyowner's variable life contract has an initial face amount of $200,000 and a separate account value of $150,000. Investment performance has been poor. Assuming the contract uses a variable death benefit equal to the greater of the face amount or a specified percentage of cash value, what is the death benefit payable?

  1. $200,000 Correct answer.
  2. $350,000
  3. $150,000
  4. $50,000

Explanation

The guaranteed minimum death benefit floor in variable life is typically the initial face amount, so the beneficiary receives $200,000 even though the account value is lower. The account value does not reduce the death benefit below the guarantee.

Question 28Life Insurance Basics and General Insurance Concepts

An applicant for variable life insurance completes the application and the insurer issues the policy. Which document must be delivered to the policyowner and signed to acknowledge receipt before the policy takes effect, where required by state law?

  1. The insurer's annual report
  2. The agent's commission schedule
  3. The reinsurance treaty summary
  4. The prospectus and a policy receipt or acknowledgment form Correct answer.

Explanation

Because the contract is a registered security, the buyer must receive a current prospectus describing the separate account, its charges, and its risks, along with acknowledgment of delivery. This disclosure requirement accompanies the policy delivery and free-look period.

Question 29Life Insurance Basics and General Insurance Concepts

A variable life policyowner wants to move accumulated value from a bond subaccount into an equity subaccount. What is the tax treatment of this transfer within the same contract?

  1. It is taxable only if the transfer exceeds the premiums paid
  2. It triggers a 10% early withdrawal penalty
  3. It is a tax-free transfer among subaccounts within the same policy Correct answer.
  4. It is a taxable distribution of the transferred amount

Explanation

Reallocations among subaccounts inside a single variable life contract are not taxable events because the policy remains intact and no value leaves the contract. Taxation of gain is deferred until a distribution, surrender, or death benefit payment occurs.

Question 30Life Insurance Basics and General Insurance Concepts

What is the primary purpose of the free-look provision in a variable life insurance policy?

  1. To allow the insurer to rescind the contract for misrepresentation
  2. To allow the producer to replace the policy with a different product
  3. To give the owner a stated period after delivery to return the policy for a refund of premium Correct answer.
  4. To permit the owner to skip premium payments without lapse

Explanation

The free-look right lets the policyowner examine the contract, including the prospectus and separate account charges, and return it within a statutory period for a refund, which in variable contracts is typically the account value or premiums paid. It protects the buyer during the initial decision period.

Question 31Life Insurance Basics and General Insurance Concepts

A variable life policyowner dies during a period when the separate account value is $180,000 and the guaranteed minimum death benefit is $250,000. The contract uses the greater-of formula. What amount is payable to the beneficiary, and is it subject to income tax?

  1. $180,000, taxable as ordinary income
  2. $430,000, taxable in part
  3. $250,000, generally received income-tax free as a death benefit Correct answer.
  4. $70,000, taxable as a capital gain

Explanation

The beneficiary receives the greater of the account value or the guaranteed minimum, which is $250,000, and life insurance death proceeds are generally excluded from the beneficiary's gross income. The excess over the account value is funded by the insurer's mortality guarantee.

Question 32Life Insurance Basics and General Insurance Concepts

Which charge in a variable life policy is deducted from the separate account to compensate the insurer for the risk that mortality experience will be worse than assumed?

  1. The investment advisory fee
  2. The premium load
  3. The mortality and expense risk charge Correct answer.
  4. The surrender charge

Explanation

The mortality and expense risk charge compensates the insurer for guaranteeing mortality charges and expense levels and for the death benefit guarantee. It is expressed as a percentage of separate account assets and is disclosed in the prospectus.

Question 33Life Insurance Basics and General Insurance Concepts

A producer is comparing a variable life policy with a fixed whole life policy for a client. Which feature most clearly distinguishes the two products?

  1. The policyowner's assumption of investment risk in a separate account Correct answer.
  2. The presence of a death benefit
  3. The requirement of medical underwriting
  4. The availability of a cash value

Explanation

Both products provide a death benefit, require underwriting, and build cash value, but only variable life places cash value in a separate account where the policyowner bears investment risk. Fixed whole life credits guaranteed values in the insurer's general account.

Question 34Life Insurance Basics and General Insurance Concepts

An insured under a variable life policy wants to increase the face amount after issue. What is the typical consequence?

  1. The increase voids the existing policy
  2. The increase is prohibited in variable life contracts
  3. The increase is automatic and requires no evidence of insurability
  4. The increase requires evidence of insurability and may be subject to a new contestability period for the added amount Correct answer.

Explanation

Increases in face amount are treated as new insurance, so the insurer underwrites the additional coverage and the contestability period generally restarts for the increased portion. The original face amount retains its original contestability timing.

Question 35Life Insurance Basics and General Insurance Concepts

Which statement about the separate account of a variable life insurer is correct?

  1. Separate account assets are held apart from the general account and are used to support variable contract obligations Correct answer.
  2. Assets in the separate account are available to satisfy the claims of the insurer's general creditors
  3. Separate account earnings are taxed to the insurer as ordinary income each year
  4. Separate account assets must be invested only in government securities

Explanation

The separate account is legally segregated from the insurer's general assets and dedicated to variable contract obligations, which is why its performance flows to policyowners. Segregation also protects the account from general creditors in insolvency.

Question 36Life Insurance Basics and General Insurance Concepts

A client asks whether the cash value of a variable life policy can be accessed during the insured's lifetime. Which answer is most accurate?

  1. Cash value may be borrowed against or withdrawn, with loans generally not taxable while the policy remains in force and withdrawals taxed on a gain-first basis to the extent of gain Correct answer.
  2. Cash value can be withdrawn only after age 65
  3. Cash value can never be accessed before death
  4. Any access is always tax free

Explanation

Policy loans are generally not taxable events while the contract remains in force, while partial withdrawals are taxed to the extent of accumulated gain and may reduce the death benefit. Access is therefore possible but carries tax and contract consequences that must be explained.

Question 37Life Insurance Basics and General Insurance Concepts

An insurer issuing variable life policies must value separate account assets to determine the contract's cash value. Which valuation approach is standard?

  1. Market value of the underlying assets determined at least each business day Correct answer.
  2. Original issue price of the subaccount shares
  3. A value fixed annually by the insurer's board
  4. Amortized cost as of the date of purchase

Explanation

Separate account units are valued at market, typically at the close of each business day, so that cash value reflects current investment performance. Daily valuation supports the pricing of purchases, redemptions, and transfers among subaccounts.

Question 38Life Insurance Basics and General Insurance Concepts

A variable life policyowner has paid $60,000 in premiums and the policy's cash value is $95,000. The owner surrenders the policy. What is the tax result, assuming no prior loans or withdrawals?

  1. $35,000 of gain is taxable as ordinary income Correct answer.
  2. $95,000 is taxable as ordinary income
  3. The entire amount is tax free because it is life insurance
  4. $60,000 is taxable as a capital gain

Explanation

On surrender, the policyowner is taxed on the excess of the amount received over the investment in the contract, which is the $60,000 basis, producing $35,000 of ordinary income. Amounts recovered up to basis are a return of premium and are not taxed.

Question 39Life Insurance Basics and General Insurance Concepts

An insurer's variable life separate account holds assets of $500 million and the guaranteed minimum death benefit exposure exceeds the account value by a material margin during a market decline. Which risk does the insurer retain in this situation?

  1. The investment risk of the subaccount securities
  2. The interest rate risk of the general account bond portfolio
  3. The credit risk of the policyowner's premium payments
  4. The mortality and expense risk associated with the death benefit guarantee Correct answer.

Explanation

When account values fall below the guaranteed minimum death benefit, the insurer must pay the difference, which is the mortality and expense risk it retains and charges for. Investment risk on the subaccount securities remains with the policyowner.

Question 40Life Insurance Basics and General Insurance Concepts

A registered representative holds a securities license but no state insurance license and completes an application for a variable life policy. Which statement best describes the regulatory consequence?

  1. The sale is permissible if the insurer approves the application
  2. The sale is permissible because the securities license covers the entire transaction
  3. The sale violates state insurance law and may subject the producer and insurer to penalties Correct answer.
  4. The sale is permissible because variable life is not an insurance product

Explanation

Variable life requires both credentials, so a securities license alone does not authorize solicitation of the insurance contract. Selling without the required state license can result in regulatory action against the producer and the insurer and may affect the enforceability of the transaction.

Question 41Life Insurance Policies and Policy Provisions

Under the standard variable life insurance framework in the United States, which party bears the investment risk on the assets held in the separate account?

  1. The insurer's general account
  2. The state guaranty association
  3. The Securities and Exchange Commission
  4. The policyowner Correct answer.

Explanation

In variable life, cash values are not guaranteed and fluctuate with the performance of the separate account subaccounts chosen by the owner. Because the owner directs the investment and absorbs gains and losses, the owner bears the investment risk. The insurer bears only mortality and expense risk, not investment risk.

Question 42Life Insurance Policies and Policy Provisions

Which federal statute requires that a variable life insurance policy be sold as a security, with delivery of a prospectus to the buyer?

  1. The Investment Company Act of 1940
  2. The Securities Act of 1933 Correct answer.
  3. The Securities Exchange Act of 1934
  4. The Employee Retirement Income Security Act of 1974

Explanation

Because a variable life policy is a security, its offering must be registered and a prospectus delivered under the Securities Act of 1933. The Investment Company Act of 1940 governs the separate account as an investment company, a related but distinct requirement. The 1934 Act regulates exchanges and broker-dealers.

Question 43Life Insurance Policies and Policy Provisions

A producer wishes to sell variable life insurance in a state. Which combination of licenses is required to lawfully solicit the product?

  1. A securities license only
  2. A life insurance license only
  3. A property and casualty license plus a life license
  4. Both a state life insurance license and a FINRA securities registration Correct answer.

Explanation

Variable life is dual-regulated: it is an insurance product and a security. The producer must hold a state life insurance license and be registered to sell securities, typically through a FINRA member broker-dealer. Holding only one of the two credentials does not permit solicitation.

Question 44Life Insurance Policies and Policy Provisions

The separate account supporting a variable life policy is best described as which of the following?

  1. Assets held in trust by the state insurance department
  2. Assets owned by the policyowner and held in the owner's name
  3. Assets held in the insurer's general account and guaranteed
  4. Assets held by the insurer but segregated from the general account Correct answer.

Explanation

The separate account is owned by the insurer but legally segregated from the general account and not chargeable with general account liabilities. Policyowners hold a contract interest in the account rather than direct ownership of the underlying securities. This segregation is what allows investment performance to pass through to the owner.

Question 45Life Insurance Policies and Policy Provisions

Which element of a variable life policy is guaranteed by the insurer regardless of separate account performance?

  1. The investment return credited to subaccounts
  2. The cost of insurance per thousand of net amount at risk
  3. The death benefit minimum floor Correct answer.
  4. The cash surrender value

Explanation

Variable life provides a guaranteed minimum death benefit floor, typically equal to the initial face amount, even if subaccount performance is poor. Cash value, investment return, and the cost of insurance are not guaranteed. This floor is the feature that distinguishes variable life from variable universal life, which may have no such guarantee.

Question 46Life Insurance Policies and Policy Provisions

A variable life policyowner allocates premium to an equity subaccount. If the subaccount loses value, how does the policy's death benefit respond?

  1. It falls below the guaranteed minimum
  2. It may decline but never below the guaranteed floor Correct answer.
  3. It remains fixed at the original face amount under all circumstances
  4. It increases automatically to offset the loss

Explanation

In variable life, the death benefit can rise or fall with separate account performance, but it cannot fall below the guaranteed minimum floor stated in the contract. A decline in subaccount value reduces the death benefit only to the extent it exceeds the floor. The floor therefore protects the beneficiary in poor markets.

Question 47Life Insurance Policies and Policy Provisions

Which document must be delivered to a prospective variable life purchaser and describes the separate account, charges, and investment objectives?

  1. The buyer's guide
  2. The conditional receipt
  3. The policy illustration
  4. The prospectus Correct answer.

Explanation

The prospectus is the securities disclosure document that describes the separate account, its subaccounts, fees, and risks, and must be delivered before or at the time of sale. A policy illustration projects hypothetical values but is not the securities disclosure. The buyer's guide explains life insurance generally and is not a substitute.

Question 48Life Insurance Policies and Policy Provisions

An insurer issuing variable life policies must register the separate account as which type of entity?

  1. A real estate investment trust
  2. An open-end management investment company Correct answer.
  3. A bank collective trust
  4. A closed-end fund

Explanation

Separate accounts offering redeemable interests with fluctuating value are typically registered under the Investment Company Act of 1940 as open-end management investment companies, commonly structured as unit investment trusts. This registration subjects the account to SEC oversight and disclosure rules. The other entity types describe different investment vehicles.

Question 49Life Insurance Policies and Policy Provisions

Which charge in a variable life policy compensates the insurer for the risk that actual mortality experience is worse than assumed?

  1. The surrender charge
  2. The mortality and expense risk charge Correct answer.
  3. The premium load
  4. The subaccount management fee

Explanation

The mortality and expense risk charge compensates the insurer for guaranteeing mortality charges and expense levels, and for assuming the death benefit floor risk. Premium loads recover sales and administrative costs, and surrender charges recover acquisition costs on early termination. Subaccount management fees pay the investment adviser.

Question 50Life Insurance Policies and Policy Provisions

A policyowner pays a $3,000 premium on a variable life policy with a 6% front-end load. How much is available for allocation to subaccounts?

  1. $3,000
  2. $2,700
  3. $3,180
  4. $2,820 Correct answer.

Explanation

A 6% front-end load deducts $180 from the $3,000 premium, leaving $2,820 to be allocated to the selected subaccounts. The load compensates for sales and administrative expenses before investment. Front-end loads reduce the amount that participates in market performance.