Master Variable Life Insurance: Coverage and Investment Insight

Variable life insurance is a unique financial product that combines the benefits of life insurance with investment choices. It offers policyholders the flexibility to allocate portions of their premiums into various investment options, which can influence the cash value accumulation and death benefit of the policy.

Detailed Explanations

What is Variable Life Insurance?

Variable life insurance is a permanent life insurance policy featuring a death benefit, cash value, and the ability to invest. Unlike traditional life insurance, the policyholder can choose how to allocate their cash value among a variety of separate accounts, which are similar to mutual funds.

• Death Benefit: The primary purpose of a variable life insurance policy is to provide a death benefit to the beneficiaries. The death benefit is typically tax-free and can be used to cover expenses such as funeral costs, estate taxes, or provide financial security to the heirs.

• Cash Value Accumulation: This is a savings component that grows over time. As premium payments are made, part of the payment goes into an investment account where it has the potential to grow based on the chosen investments.

• Investment Choices: Policyholders have the flexibility to decide how their cash value is invested among various asset classes, such as stocks, bonds, or money markets. The cash value can grow through dividends, interest, or capital gains.

• Policy Loans: Policyholders can borrow against the accumulated cash value of their policy, often with the advantage of favorable loan terms. Loans do not require credit checks and are not taxable.

Examples

Example 1: Benefits of Variable Life Insurance

Consider Mike, a 35-year-old, who purchases a variable life insurance policy with a death benefit of $500,000. Mike chooses to invest his policy’s cash value in a mixed portfolio of stocks and bonds:

• Death Benefit Adjustment: Over the years, the investment performance of Mike’s chosen portfolio enhances his policy’s cash value and death benefit. If the investments perform well, the death benefit can increase beyond the guaranteed minimum.

• Cash Value Growth: Due to favorable market conditions, the cash value in Mike’s policy grows significantly, allowing him to take out a tax-free loan to fund his child’s education.

Example 2: Risks and Considerations

Lisa, another policyholder, aggressively invests in technology stocks which subsequently underperform. Although her policy still provides a guaranteed death benefit, the cash value depletes due to poor investment performance, necessitating higher premium payments to maintain the policy.

Visual Aids

Consider the following diagram to better understand the structure of a variable life insurance policy:

    flowchart TD;
	    A[Variable Life Insurance] --> B[Death Benefit]
	    A --> C[Cash Value]
	    C --> D[Investment Choices]
	    D --> E{Stock Funds}
	    D --> F{Bond Funds}
	    C --> G[Policy Loans]

Practice Questions

Summary Points

• Variable life insurance provides both a death benefit and cash value accumulation.
• Premiums are allocated to chosen investment options, affecting policy value.
• Policyholders possess flexibility in managing their funds, acknowledging inherent risks.
• Understanding your premium structure, allocation choices, and potential risks is crucial.

Glossary of Related Terms

• Cash Value: The component of a life insurance policy that accumulates on a tax-deferred basis.
• Death Benefit: The amount paid to beneficiaries upon the insured’s death.
• Premium: Regular payments made to keep the insurance policy active.
• Investment Options: Various accounts where the cash value can be invested, selected by the policyholder.
• Policy Loans: Funds taken against the cash value of an insurance policy which do not require repayment within a specific period.

Additional Resources

For further study and detail explanation, consider exploring these resources:

• “FINRA Series 6 Exam Guide”
• “Investment Company Products and Variable Contracts”
• Online Investment Tutorials and Webinars

This comprehensive look at variable life insurance equips candidates with the necessary knowledge to not only pass the FINRA Series 6 exam but excel as industry professionals.