Chapter 13 Part 2 Flashcards
In a variable life insurance policy, the policy owner
not the insurance company, decides how the premium payments will be invested. however, an important feature of this type of insurance is that the death benefit generally may not decrease belom a certain guaranteed minmum. Variable life insurance is not for everyone. The client must be sophisticated and knowledgeable enough to understand the available investment options. he must be able to tolerate the fact that the policy’s cash value may fluctuate greatly.
In a variable life insurance policy, the policyholder makes premium payments to the insurance company that issued the policy. The company first deducts various charges and expenses, including sales charges and the cost of the insurance. The company then deposits the remainder (the net premium payments) in
a separate account
The separate account is the
investment account in which the net premium payments made by the owners of variable life insurance and variable annuities are deposited. As the name suggests, the assets of the separate account arc strictly segregated from the company’s general account. The earnings in the separate account (capital gains, interest, and dividends) are reinvested in the separate account. By the same token, if the investments in tile separate account lose money, the losses are charged against the separate account, not the company’s general account. If the
insurance company goes bankrupt, its creditors may not make claims against the separate account
The separate account generally consists of a series of
subaccounts. Each subaccount corresponds to a different investment portfolio, which may contain money-market funds, bonds, stocks, small-cap stocks, etc. Most companies also give policyholders the option of investing their net premium payments in a fixed account. The individual subaccounts must also be registered with the SEC
Since each of the subaccounts contains dilferent types of securities and different investment objectives, the policyholder can select the
subaccounts that best suit his needs. For example, an investor in his twenties who wants to sec his death benefit and cash value grow as much as possible over the long term may choose to invest all of his net premiums in a subaccount that contains growth stocks. Policyholders may diversify by investing in different subaccounts. Also, policyholders may transfer money from one subaccount to another as their investment objectives change without tax ramifications
The premium payments for variable life insurance policies are generally
fixed and level
The cash value of a variable life insurance policy is determined by
the performance of the subaccounts in which the policyholder invests the net premium payments. Therefore, the cash value could theoretically decline to zero if these investments perform poorly. The cash value is normally calculated evety business day (just like the net asset value of a mutual fund)
The owner may borrow against the
cash value of the policy up to certain limits (usually 75% to 90% of the policy’s cash value). As with traditional whole life and universal policies, the loan and any accumulated interest are deducted from the death benefit if they are still outstanding at the time the insured dies
The owner may withdraw some of the money from the policy’s cash value without
surrendering the policy (a partial surrender) or may cancel the policy in its entirety and receive the entire cash surrender value. An mmer who takes either one of these actions may be required to pay surrender charges depending on how long the policy has been in force
Most variable life insurance policies are sold with a fixed
death benefit. However, the death benefit may increase depending on the performance of the subaccounts in which the policy owner invests. Generally, the death benefit may not fall below a certain minimum-the face value of the policy. the insurance company guarantees a minimum death benefit as long as the owner makes all of the required policy payments and does not take out loans against the policy
The policyholder, not the insurance company, shoulders all the
investment risk in a variable life insurance policy. The cash value of the policy will fluctuate depending on the subaccounts in which the owner invests. The insurance company’s only obligation is to pay the minimum death benefit when the insured dies
A significant advantage of variable life insurance policies is the ability to
invest some of the premium payments in stocks or other assets that have historically paid high returns over the long term. These types of investments give policyholders the potential to grow their cash value and death benefits, and may help protect policyholders and their beneficiaries from the negative effects of inflation
Variable universal life policies combine the
flexibility of universal life policies with the investment aspect of variable life policies. Policy owners may adjust their premiums and death benefits as their circumstances warrant. they may also decide how their net premiums are invested among the subaccounts that the insurance company offers in its separate account
The death benefit from a life insurance policy passes
tax-free to the beneficiary. However, if the deceased owned the policy, the death benefit will be included in his estate for the purpose of calculating estate taxes. In order to avoid this problem, many tax advisers recommend that the insurance policy be placed in the name of the beneficiary or in an irrevocable life insurance trust
Rather than purchasing some combination of individual stocks and bonds for their portfolios, many investors find it more convenient and cost-effective to purchase these securities indirectly through
packaged products. A packaged product allows investors to share in a large, professionally managed portfolio. Many packaged products are structured as investment companies. The most popular are management companies and the most popular management company is the open-end management company, more commonly known as a mutual fund
