Investment Component

• Separate accounts: Cash value invested in subaccounts (stocks, bonds, money market, etc.)
• Policyholder chooses: Select from available investment options
• Market risk: Cash value fluctuates based on investment performance
• No guaranteed cash value: Unlike whole life, cash value not guaranteed (can decrease)
• Higher potential returns: Can outperform fixed-rate policies in strong markets

Securities Product

• Regulated as security: Subject to SEC (Securities and Exchange Commission) regulation
• Prospectus required: Must provide prospectus to potential buyers
• Dual licensing required: Must have life insurance license AND securities license
• FINRA oversight: Subject to Financial Industry Regulatory Authority rules

Permanent Coverage

• Lifetime protection: Designed for permanent coverage like whole life
• Minimum guaranteed death benefit: Traditional variable life guarantees minimum
• Death benefit can increase: Can grow if investments perform well
• Premium requirements: Must pay sufficient premiums to maintain coverage

To sell variable life insurance, agents must have both:

1. State Life Insurance License

• Standard requirement: Same license for selling whole life and term
• State-specific: Licensed in state where policy sold

2. FINRA Securities Registration

• Series 6: Investment Company and Variable Contracts Products license (limited)
• Allows sale of mutual funds, variable annuities, variable life
• Does NOT allow stocks, bonds, or other securities
• Series 7: General Securities Representative license (comprehensive)
• Allows sale of all securities including variable products
• More comprehensive than Series 6
• Series 63: Uniform Securities Agent State Law (often required in addition)

3. Firm Registration

• Broker-dealer: Must be associated with registered broker-dealer
• Supervision: Subject to supervisory review of variable product sales

Structure

• Fixed premiums: Level premium like whole life (not flexible)
• Scheduled premium: Must pay specified premium amount
• Separate accounts: Cash value invested in subaccounts
• Minimum death benefit: Guaranteed minimum (usually initial face amount)
• Increasing death benefit potential: Can increase if investments perform well

Death Benefit

• Guaranteed minimum: Typically the initial face amount (e.g., $250,000)
• Increases with performance: If cash value growth exceeds certain level
• Decreases with poor performance: But not below guaranteed minimum
• Net amount at risk: Difference between death benefit and cash value

Example:

Initial face amount: $250,000 (guaranteed minimum)
Cash value after 10 years: $80,000 (strong market performance)
Actual death benefit: $280,000 (increased due to cash value growth)

If investments later decline:
Cash value drops to: $40,000
Actual death benefit: $250,000 (reverts to guaranteed minimum)

Cash Value

• No guarantee: Can increase or decrease based on investment performance
• Can lose value: Poor investment returns reduce cash value
• Potential for growth: Can outperform whole life in bull markets
• Access: Can borrow or withdraw (like other permanent policies)

Premiums

• Fixed level premiums: Same amount due each year (not flexible)
• Must be paid: Missing premiums can cause policy to lapse
• Higher than whole life: Typically more expensive due to investment features
• Insufficient premiums: If cash value depleted and premiums not paid, policy lapses

VUL combines the investment features of variable life with the flexibility of universal life.

Key Features

• Flexible premiums: Can adjust premium amounts (like UL)
• Adjustable death benefit: Can increase or decrease face amount (like UL)
• Separate accounts: Invested in subaccounts (like variable life)
• Market risk: Policyholder bears investment risk
• No guaranteed cash value: Cash value can decrease to zero
• Minimum guarantees: Some VUL policies offer no-lapse guarantees

Premium Flexibility

• Variable payments: Can pay more, less, or skip premiums
• Minimum required: Must maintain minimum to keep policy in force
• Overfunding option: Can add extra to build cash value faster (MEC limits apply)
• Underfunding risk: May cause policy to lapse if cash value insufficient

Death Benefit Options

• Option A (Level): Fixed face amount
• Option B (Increasing): Face amount plus cash value
• Adjustable: Can change between options (may require underwriting)

Lapse Risk

VUL has higher lapse risk than traditional variable life:
- Market downturns: Poor investment returns deplete cash value
- Rising COI charges: Cost of insurance increases with age
- Insufficient premiums: Flexible premiums may lead to underfunding
- No minimum guarantee: Cash value can drop to zero

Separate accounts are the investment vehicles in variable products:

Structure

• Legally separate: Assets held separately from insurer's general account
• Not subject to creditors: Protected from insurer's creditors if insurer fails
• Divided into subaccounts: Each subaccount is like a mutual fund
• Professional management: Each subaccount managed by portfolio managers

Investment Options

Typical subaccount choices:
- Equity funds: Stocks (aggressive growth, growth, value, international)
- Bond funds: Fixed income (government, corporate, high-yield)
- Balanced funds: Mix of stocks and bonds
- Money market: Cash equivalents (lowest risk, lowest return)
- Index funds: Track market indexes (S&P 500, etc.)
- Sector funds: Specific industries (technology, healthcare, etc.)

Asset Allocation

• Policyholder chooses: Select percentage in each subaccount
• Can change allocation: Typically can reallocate quarterly or more often
• Dollar cost averaging: Some policies allow automatic monthly transfers
• Rebalancing: Can rebalance to maintain target allocation

Example Allocation:

40% - Large Cap Stock Fund
20% - International Stock Fund  
25% - Bond Fund
10% - Small Cap Stock Fund
5% - Money Market Fund

Policyholder Bears Risk

• Market risk: Value declines with poor market performance
• No guaranteed returns: Unlike whole life's guaranteed rate
• Can lose principal: Cash value can decrease below premiums paid
• Volatility: Cash value fluctuates with market conditions

Potential for Higher Returns

• Upside potential: Can earn higher returns than fixed-rate policies
• Long-term growth: Historically, stocks outperform bonds and cash
• Tax-deferred growth: Investment gains grow tax-free until withdrawn
• Compound growth: Reinvested gains grow over time

Diversification

• Multiple subaccounts: Spread risk across different investments
• Asset classes: Mix of stocks, bonds, money market reduces volatility
• Professional management: Expert portfolio managers make investment decisions

Variable products have multiple layers of fees:

Insurance Charges

• Mortality and expense (M&E) risk charge: Typically 1-1.5% annually
• Compensates insurer for insurance risks
• Covers guaranteed death benefit
• Cost of insurance (COI): Monthly charge for death benefit
• Increases with age
• Based on mortality tables
• Administrative fees: Policy maintenance ($5-15/month)

Investment Charges

• Subaccount management fees: Typically 0.5-2% annually
• Like mutual fund expense ratios
• Paid to investment managers
• Varies by subaccount
• Transfer fees: May charge for excessive transfers between subaccounts

Surrender Charges

• Early withdrawal penalties: Typically 7-15 year declining schedule
• Percentage of premium or account value: E.g., Year 1: 10%; Year 10: 0%
• Applies to surrenders: Full or partial withdrawals may trigger charges

Other Charges

• Premium load: Front-end charge on premiums (if applicable)
• Rider charges: Additional costs for optional riders
• CDSC (Contingent Deferred Sales Charge): Back-end load on some contracts

Example Total Annual Cost:

M&E risk charge: 1.25%
COI charge: 0.50% (age 45)
Subaccount fees: 0.75% (average)
Admin fee: $120/year
Total effective cost: ~2.5% + $120/year

Tax-Deferred Growth

• No current taxation: Investment gains not taxed annually
• Compound growth: Money that would go to taxes stays invested
• Tax benefit: Significant advantage over taxable accounts

Distributions

• Withdrawals: Taxed as ordinary income to extent of gain (FIFO basis)
• Loans: Not taxable if policy maintained
• Surrender: Gain taxed as ordinary income
• Modified Endowment Contract (MEC): Loans and withdrawals taxed less favorably

Death Benefit

• Income tax-free: Beneficiaries receive death benefit tax-free
• Estate taxes: May be subject to estate tax if large estate
• Step-up not applicable: Unlike inherited investments (no step-up in basis)

Securities and Exchange Commission (SEC)

• Registration: Variable contracts registered with SEC
• Prospectus: Must be delivered before or at sale
• Disclosure: Full disclosure of risks, fees, features required
• Advertising rules: Subject to SEC advertising regulations

FINRA (Financial Industry Regulatory Authority)

• Suitability: Must determine product suitable for client
• Know Your Customer (KYC): Understand client's financial situation
• Supervision: Sales subject to broker-dealer supervision
• Record keeping: Detailed records of recommendations and sales

State Insurance Regulation

• Insurance license: Subject to state insurance regulations
• Suitability standards: State insurance suitability rules apply
• Replacement regulations: Special rules if replacing existing policy

Prospectus

Must include:
- Investment options: Description of all subaccounts
- Fees and charges: Complete fee disclosure
- Risks: Investment and insurance risks
- Historical performance: Past subaccount returns
- Guarantees: What is and isn't guaranteed

1. Higher return potential: Can outperform fixed-rate policies
2. Investment control: Choose how cash value is invested
3. Tax-deferred growth: No annual tax on investment gains
4. Death benefit protection: Minimum guaranteed death benefit (traditional VL)
5. Professional management: Expert portfolio managers
6. Inflation hedge: Equity investments can keep pace with inflation
7. Separate account protection: Assets protected if insurer fails
8. Flexibility (VUL): Adjustable premiums and death benefit

1. Investment risk: Cash value can decrease or be lost entirely
2. Complexity: More complicated than traditional life insurance
3. Higher fees: Multiple layers of charges reduce returns
4. No guaranteed cash value: Unlike whole life's guaranteed growth
5. Market volatility: Cash value fluctuates with market conditions
6. Lapse risk: Policy can lapse if cash value depleted
7. Licensing requirements: Requires securities license to purchase
8. Requires active management: Must monitor investments and make allocation decisions

Best For:

• Investment-savvy individuals: Comfortable managing investments
• Long-term planning: Time horizon of 15+ years
• Higher risk tolerance: Can accept market volatility
• Maximum growth potential: Want upside potential over guarantees
• Tax-deferred accumulation: High-income earners seeking tax advantages
• Younger insureds: More time to recover from market downturns

Not Ideal For:

• Risk-averse individuals: Cannot tolerate market losses
• Simplicity seekers: Prefer straightforward products
• Guaranteed income needs: Require predictable cash value growth
• Short-term needs: Need coverage for defined period (use term instead)
• Seniors: Less time to recover from market losses
• Those without securities license: Cannot purchase without proper licensing

• Variable life = separate accounts + investment risk + securities product
• Dual licensing required: Life insurance license + FINRA registration (Series 6 or 7)
• Prospectus required: Must be delivered before or at sale
• Policyholder bears investment risk: Cash value can increase or decrease
• No guaranteed cash value: Unlike whole life
• Minimum guaranteed death benefit: Traditional variable life (not VUL)
• Separate accounts: Protected from insurer's creditors
• VUL = variable life + universal life flexibility
• VUL higher lapse risk: Due to flexible premiums and no cash value guarantee
• M&E charge: Mortality and expense risk charge (1-1.5% typically)
• Subaccount fees: Like mutual fund expense ratios
• Tax-deferred growth: Investment gains not taxed until withdrawn
• Death benefit tax-free: To beneficiaries (income tax)
• Suitability required: Must determine product appropriate for client
• SEC and FINRA regulation: Subject to securities regulations
• Can reallocate: Change investment mix among subaccounts
• Dollar cost averaging: Automatic periodic transfers available