Whole Life Insurance: Sec Registration Requirements

The Securities and Exchange Commission (SEC) is responsible for the regulation of variable insurance under the Investment Company Act of 1940. Variable insurance products, which include variable annuities and variable life insurance, differ from traditional fixed dollar insurance contracts in the way in which benefits are funded. Premium payments are held in a separate account that provides the contract owner with a variety of investment options.

Some life insurance policies are considered securities, which means the contracts must be registered with the SEC and sales are regulated by the Financial Industry Regulatory Authority (FINRA). Variable life insurance is a type of security that offers fixed premiums and a minimum death benefit.

Therefore, whole life insurance does have to register with the SEC if it is a variable insurance product.

Variable life insurance is a form of life insurance

Variable life insurance is intended to meet certain insurance needs, investment goals, and tax planning objectives. It is a policy that pays a specified amount to your beneficiaries upon your death. It also has a cash value that varies according to the amount of premiums you pay, the policy's fees and expenses, and the performance of a menu of investment options offered under the policy.

Variable life insurance policies are regulated by the Securities and Exchange Commission (SEC) and sales are regulated by FINRA. As with other financial products, insurance products can be complex and come with fees, so it is important to do your research before purchasing a variable life insurance policy.

• Know how it works: Look up key terms you may not be familiar with and ask your financial professional questions to determine if the policy is right for you.
• Figure out the costs: Ask about the fees and expenses associated with the policy.
• Get the details: Different policies have different features. Ask your financial professional for the policy prospectus, which will describe the policy in detail. Read the prospectus carefully and ask questions about anything you don't understand.
• Consider your needs and goals: Think about your insurance needs, investment goals, and tax situation to determine if variable life insurance is the best option for you.
• Affordability: Consider whether you can afford the policy. The fees and expenses associated with variable life insurance policies can be significant.
• Overall financial scenario: Think about how the policy fits within your overall financial plan.

Variable life insurance provides a death benefit that may be significantly larger than the amount of premiums you pay. With this type of policy, you will be required to pay premiums into an account. The money in the account is then invested in a menu of investment options, typically mutual funds, that you can select.

The value of your account will depend on the amount of premiums you pay, the amount of policy fees and expenses, and the performance of the investment options you choose. It's important to note that variable life insurance involves investment risks, and you could lose money, including your initial investment, if the investment options you selected perform poorly.

Variable life insurance is similar to traditional life insurance

Variable life insurance is a type of permanent life insurance policy, which means it provides coverage for the duration of the insured person's life. Like other forms of permanent life coverage, variable life insurance policies carry an investment component, known as its cash value, as well as a guaranteed death benefit in most cases.

Another difference between variable and traditional life insurance is that variable life insurance policies are considered securities and must be registered with the Securities and Exchange Commission (SEC). Traditional life insurance policies, on the other hand, are exempt from securities laws.

In terms of structure, variable life insurance policies have three primary components: a death benefit, premium payments, and a cash value. The death benefit is what is left to the beneficiaries after the insured person passes away. Premium payments are made by the policyholder to cover the cost of insurance and the fees of the insurer. The cash value is similar to a brokerage account, and the policyholder can choose how to invest it.

While variable life insurance offers the potential for higher returns, it also comes with higher risk. The value of the investments chosen by the policyholder can fluctuate, and there is no guarantee of a rate of return. Variable life insurance policies also tend to have higher fees and premiums than traditional life insurance policies.

Variable life insurance is regulated by the SEC

Variable life insurance is a form of whole life insurance that accumulates cash value on a tax-deferred basis. Variable life insurance operates similarly to a mutual fund because the insured pays premiums that go into a separate investment account owned by the insured. The variable life insurance policy yields a minimum death benefit to the insured like other life insurance policies. In addition, variable life insurance will have cash value that varies based on the performance of the investments, and part of the death benefit may be variable as well.

The SEC began regulating variable insurance products soon after their introduction in the 1950s. While traditional insurance products are exempt from securities laws, the courts have agreed with the Commission that variable insurance contracts are not exempt because the contract owner, rather than the insurance company, bears the investment risk. Variable life insurance policies are securities and must be registered with the SEC.

The OIP has 13 staff and is part of the Division of Investment Management. While most staff are involved in one aspect of the regulation of mutual funds, OIP staff handle all matters relating to the regulation of variable insurance, including the review of disclosure filings, the issuance of exemptive applications, no-action letters, and rulemaking. In recent years, the continuity of OIP's program operations has been hindered by staff turnover.

The OIP has not been able to complete work on several important priorities, including the need to develop a registration form for variable life insurance. Variable insurance products, which include variable annuities and variable life insurance, differ from traditional "fixed dollar" insurance contracts in the way benefits are funded. Premium payments are held in a "separate account" that provides the contract owner with a variety of investment options, such as money market, equity and bond funds, which are not available to purchasers of traditional insurance. The assets are segregated from the insurer's general account, which is restricted by state laws from making certain types of investments. The benefits ultimately realised by the contract owner depend on the investment performance of the separate account.

Sales of variable annuities and life insurance have grown significantly in recent years. At the end of 1994, assets held in the separate accounts of life insurance companies totalled over $350 billion. There were 4 million variable life insurance policies in force and about 6.5 million individual variable annuities.

Variable life insurance is not a short-term savings vehicle

Variable life insurance is a permanent life insurance policy with an investment component. It is a long-term financial commitment that should not be approached as a short-term savings vehicle. Here are several reasons why:

• Nature of the Product: Variable life insurance is designed to meet specific insurance needs, investment goals, and tax planning objectives. It provides a death benefit and has a cash value component that varies according to premium payments, fees, expenses, and the performance of underlying investments. This structure makes it suitable for long-term financial planning rather than short-term savings.
• Fees and Expenses: Variable life insurance policies typically come with substantial fees and expenses, including premiums, surrender charges, mortality and expense risk fees, cost of insurance, administration fees, loan interest, and underlying fund expenses. These fees can be ongoing and may increase over time, making the policy costly to maintain for short-term savings purposes.
• Investment Risks: Variable life insurance involves investment risks similar to those associated with mutual funds. The cash value of the policy is tied to the performance of the underlying investments, typically mutual funds. If the selected investments perform poorly, there is a risk of losing money, including the initial investment. This risk is inherent in the nature of the product and underscores the need for a long-term horizon to weather market fluctuations.
• Tax Implications: Variable life insurance has complex federal and state tax implications. The cash value may accumulate on a tax-deferred basis, and withdrawals or loans from the policy can have tax consequences. Understanding and managing these tax implications requires a long-term perspective, as short-term decisions may trigger unexpected tax liabilities.
• Policy Lapse: Failure to maintain sufficient cash value in the policy can lead to a policy lapse, resulting in termination without value and the loss of the death benefit for beneficiaries. This risk is heightened in the short term, especially if there are poor investment returns or withdrawals/loans against the policy.
• Suitability: Variable life insurance is generally suitable for individuals with specific life insurance protection needs. The fees, expenses, and tax implications make it less appropriate as a short-term savings vehicle. Other financial products or traditional savings accounts may be more suitable and cost-effective for short-term savings goals.

Variable life insurance involves investment risks

Variable life insurance is a type of permanent life insurance policy that combines a death benefit with an investment component. The cash value of the policy is invested in securities, typically mutual funds, and the payout amount is determined by the performance of these underlying securities.

Variable life insurance policies are considered more volatile and carry more risk than standard life insurance policies. The cash value of the policy may rise or fall in value, and there is a risk of losing money, including the initial investment. The policy's investment return is not guaranteed, and the cash value will fluctuate.

The prospectus provided by the insurance company will detail all the charges, fees, and sub-account expenses. It is important to carefully review the prospectus and understand the fees and expenses associated with the policy, as they can be significant and may require additional premium payments to prevent the policy from terminating.

Variable life insurance policies offer flexibility and choice, as policyholders can choose from several investment options and adjust their premiums and death benefits if they have sufficient funds in their cash value account. However, the investment options may be limited, and the returns on the investments are capped.

The major risk of variable life insurance is the potential loss of investments. Unlike other types of insurance policies, the insurance company does not guarantee a rate of return and does not offer protection against investment losses. The cash value component is subject to the same risks as any other investment, and there is no guaranteed rate of return.

Variable life insurance policies are also generally more expensive than other types of life insurance, with higher premiums and potential management fees for the investments.

In summary, variable life insurance involves investment risks and is suitable for individuals with specific life insurance protection needs, a long-term investment horizon, and a high-risk tolerance. It offers the potential for significant gains but also carries the possibility of losing money.

Frequently asked questions