Arizona Life and Health Practice Exam

An insurance policy that can also be classified as a securities product is called?

1. Modified life insurance

2. Universal life insurance

3. Variable life insurance

4. A Modified Endowment Contract

The correct answer is: Variable life insurance

Variable life insurance is correctly identified as an insurance policy that can also be classified as a securities product due to its investment component. This type of policy combines life insurance with an investment feature, allowing policyholders to allocate a portion of their premiums to various investment options, such as stocks, bonds, or mutual funds. The cash value of the policy can fluctuate based on the performance of these investments. Because of this investment aspect, variable life insurance is regulated both as an insurance product and as a security. This dual classification means that consumers must receive a prospectus that outlines the risks and costs associated with the investment components, similar to what is required for traditional securities. This sets variable life insurance apart from other options like modified life insurance or universal life insurance, which do not incorporate a level of investment risk in the same way. Modified Endowment Contracts also do not possess the investment character that classifies them as securities; instead, they are designed primarily as life insurance with specific tax implications. In summary, the investment element of variable life insurance that allows for potential growth through market-linked performance is what leads to its classification as both an insurance policy and a securities product.