Variable Products & Definitions
MR. WATSON: OK, folks. Here we go again. Remember, variable products shift the investment risk from the insurance company to the contract holder. Whether it's Variable life, Variable annuities, or Variable Universal life, the contract holder chooses the investments that are offered by the insurance company. Mutual funds held inside the contract. The contract holder may choose to switch from one fund to the other as she sees fit. Remember?
Student: Yep.
MR. WATSON: Also, if it says Universal, the premiums are flexible. If it says Variable, the contract holder chooses the investments. So,
- Variable life has fixed premiums and the contract holder chooses the investments.
- Universal life has flexible premiums but the company chooses the investments. However,
- Variable Universal life has flexible premiums and the contract holder chooses the investments.
MR. WATSON: Anything variable is referred to as an indeterminate contract because the values are constantly changing due to the stock market. All variable products must be held in a separate account.
Fixed Premium Variable Life
MR. WATSON: A review. Variable life has a fixed premium and a minimum guaranteed death benefit. The death benefit can rise but it can not go below the initial amount. This all depends, once again, on the underlying portfolio of mutual funds the contract holder has chosen.
Flexible premium Variable life (Variable Universal Life)
MR. WATSON: Flexible premiums, adjustable death benefit. Two death benefit options. Contract holder chooses investments.
- Option 1 - Level
- Option 2 - Increasing
MR. WATSON: If the insured wishes to increase the death benefit under Option 2, they must prove evidence of insurability (good health). This option increases the risk (mortality) to the insurance company so it will cost more than Option 1.