Final answer:
A separate account in variable life insurance allows policyholders to invest part of their premiums into various investment options, affecting the cash value and potentially the death benefit. Its performance is tied to the investments chosen, providing the possibility for higher returns but with more risk, and these funds are protected from the company's creditors.
Step-by-step explanation:
The separate account in the context of variable life insurance is an investment feature that allows policyholders to invest a portion of their premiums in a variety of investment options. This can range from stocks and bonds to money market funds. Unlike traditional cash-value (whole) life insurance that typically has a set rate of return on the cash value, the separate account's performance is tied to the chosen investments and therefore can fluctuate, providing a potential for higher returns but also posing a greater risk.
The value of the separate account will affect the cash value and possibly the death benefit of the variable life insurance policy. For example, if the investments within the separate account perform well, the cash value and potentially the death benefit could increase. Conversely, if the investments perform poorly, there is a risk that the cash value and death benefit could decrease, although some policies do offer a minimum guaranteed death benefit.
It is important to understand that the separate account is distinct from the general account of the insurance company. Funds in the separate account are not subject to the company's creditors and are solely for the benefit of the policyholders who have invested in this account. The policyholder bears the investment risk associated with the separate account.