South Carolina Life Insurance Practice Exam

Which of the following best describes the investment component of a variable life insurance policy?

1. Guaranteed return on investment

2. Dependent on the insurer's performance

3. Fixed interest rate

4. Non-variable determined by state regulations

The correct answer is: Dependent on the insurer's performance

The investment component of a variable life insurance policy is best described as dependent on the insurer's performance. This reflects the nature of variable life insurance, which allows policyholders to allocate part of their premium payments to a variety of investment options, such as stocks, bonds, or mutual funds. The cash value and death benefit of the policy can fluctuate based on the performance of these chosen investments. This option aligns with the primary feature of variable life insurance, where the policyholder takes on investment risk. As the account value increases or decreases with market performance, the overall gain or loss directly impacts the cash value and potentially the death benefit of the policy. Thus, the returns are not guaranteed, and they vary with the underlying investments' success. In contrast, other options describe characteristics that do not capture the essence of variable life insurance. For example, guaranteed returns and fixed interest rates are more typical of whole life or fixed indexed policies, where the insurer guarantees a minimum return regardless of market conditions. The non-variable option emphasizes a degree of regulation that does not apply directly to the inherently variable nature of variable life policies, which focus on market-dependent investment.