20-Plus Years of Investment in Variable Life - Part 1

20-PLUS YEARS OF INVESTMENT IN VARIABLE LIFE of a separate account was a new legal entity to life insurance.

Separate from what, you might ask. The answer to that is that it is separate from the general creditors of the life insurance company. The general account assets within an insurance company are subject to the general creditors of that company. If the insurance company gets into financial difficulties that require the state insurance commissioner to take over the company with the objective of trying to save the company, the first thing that the regulators do is to stop all payments except for death benefits.

Neither creditors nor policy owners can have access to the general account assets until the state is satisfied that an adequate restoration plan is in place. Then funds may be paid out. This could mean that general account assets could be frozen for many years and the earnings during those years could be significantly reduced. Such a company shutdown can cost policy owners both peace of mind and money.

The separate account is still owned by the insurance company; however, it is "separate" from the general account and specifically not subject to the claims of general creditors. Therefore, if an insurance company has financial difficulties, policy owners with assets in the separate accounts still can manage those assets among the sub-account investment alternatives, which are similar to mutual funds, and have access to the assets in the separate account via policy loan.

You will prefer the variable contract over the whole life contract if you want the capital in your policy invested in an assortment of sub-accounts similar to mutual funds, rather than in a long-term bond and mortgage general account portfolio typical of a whole life policy. Fixed-premium variable life provides downside protection basically by guaranteeing that the face amount of the policy will never be less than the originally issued face amount no matter what the investment results are, as long as the scheduled premiums are paid. For a policy owner to have the insurance company guarantee the death benefit, the policy owner must guarantee the insurance company the payment of the required premiums.