Question

Which of the following are TRUE of both variable life insurance and variable annuities?

I. The investment risk is borne by the contract owner.
The product must be sold with a prospectus.
II. Partial surrenders are first treated as a tax-free return of principal.
III. If the contract owner dies, the beneficiary receives any proceeds tax-free.

a. I and II only
b. III and IV only
c. I, III, and IV only
d. I, II, III, and IV

Answer 1

Both variable life insurance and variable annuities bear investment risk by the contract owner and require a prospectus to be sold, but not all surrenders or death benefits are tax-free.

Step-by-step explanation:

The question at hand falls within the domain of insurance products and their characteristics, specifically variable life insurance and variable annuities. These two financial instruments share a few key features:

• Both are contract-based investment products that allow for a level of investment control and thus, the investment risk is borne by the contract owner.
• They must both be sold with a prospectus, which is required by law to inform potential investors of the risks, costs, and possible returns of the investment.

However, there are also differences between the two:

• Partial surrenders from variable annuities are indeed treated as a tax-free return of principal initially, but this does not apply uniformly to variable life insurance.
• As for the death benefit, it is paid out to beneficiaries but often not entirely tax-free as there may be some components that are subject to taxation depending on the circumstances and the specifics of the policy.

Therefore, the correct answer to the question, "Which of the following are TRUE of both variable life insurance and variable annuities?" would be a. I and II only.