Variable life, VUL and the separate account

The exam is called Life, Health and Variable Annuity, so the variable products are not a footnote — and they are where the license question bites. Two traps account for most of the lost points: assuming an indexed product is variable because its return moves with an index, and assuming a 2-15 alone lets you sell one.

Questions and answers, explained

All 12 questions above, with the correct answer and why it is correct. Everything here is on variable life, vul and the separate account.

1. A client buys a variable annuity and returns it on day 18. During those 18 days the separate account lost value, so the contract's cash surrender value is now less than the premium paid. Under s. 626.99(4)(b), F.S., the insurer's unconditional refund must equal:

   • AThe cash surrender value provided in the contract, plus any fees or charges deducted from premiums or imposed under the contractCorrect
   • BThe cash surrender value only, with no adjustment for amounts the insurer deducted from the premiums during the 18 days
   • CThe premiums paid, reduced by a pro rata surrender charge for the 18 days the contract was actually in force
   • DNothing, because a variable contract shifts investment risk to the owner and so carries no unconditional refund right

   Why: Section 626.99(4)(b)2., F.S., measures the 21-day unconditional refund on a variable or market-value annuity as the cash surrender value provided in the contract, plus any fees or charges deducted from the premiums or imposed under the contract, or a refund of all premiums paid. Contrast s. 626.99(4)(b)1., under which a FIXED annuity must return the premiums paid including any contract fees or charges. A surrender charge may never be netted out of a free-look refund (C), and the only carve-out from the variable-contract refund right is for a prospective owner who is an accredited investor as defined in SEC Regulation D.

   Reference FL-II.A; s. 626.99(4)(b), F.S.

2. Which statement about the cash value of a variable universal life policy is correct?

   • AThe insurer guarantees a minimum cash value at least equal to the premiums paid.
   • BCash value is credited at the insurer’s declared rate, subject to a 3% floor.
   • CThere is no guaranteed minimum; poor subaccount performance can cause a lapse.Correct
   • DCash value is held in the general account and is protected from market losses.

   Why: In a VUL the owner directs the money into separate-account subaccounts and bears all the investment risk, so the cash value has no floor and can fall far enough that policy deductions exhaust it and the contract lapses. Option D is the closest distractor and describes the general-account backing of fixed products such as interest-sensitive whole life. Some variable contracts guarantee a minimum death benefit, but that guarantee does not extend to the cash value. (Outline I.B.)

   Reference FL 2-15 Outline I.B (Variable universal life)

3. Under Florida law governing variable contracts, assets allocated to an insurer's separate account are:

   • AAvailable to the insurer’s general creditors on the same basis as general account assets.
   • BHeld apart from the general account and not chargeable with other business liabilities.Correct
   • CTitled directly in the name of each individual contract owner.
   • DRequired to be invested only in United States Treasury securities.

   Why: Section 627.802, F.S., authorizes life insurers to establish separate accounts for variable contracts and provides that the portion of the separate account's assets equal to the reserves and other contract liabilities of that account is not chargeable with liabilities arising out of any other business the insurer conducts. Option C is the closest distractor: the insurer owns the separate-account assets, while the contract owner holds contractual unit values, not direct title to the securities. The separate account invests according to the objectives disclosed in the prospectus, not solely in Treasuries. (Outline FL-II.)

   Reference FL-II (variable contracts; separate accounts); s. 627.802, F.S.

4. When a variable life insurance or variable annuity sale is solicited, the prospect must be given which document at or before the time of solicitation?

   • AA current prospectus for the separate account and its subaccounts.Correct
   • BA copy of the insurer's annual statutory financial statement.
   • CThe agent's FINRA Form U4 registration record.
   • DA certificate of authority issued by the Florida Office of Insurance Regulation.

   Why: Because a variable contract is a security, federal securities law requires delivery of a current prospectus describing the separate account, its subaccounts, objectives, risks and charges, no later than the time of the sales solicitation. Option B is the closest distractor: statutory financial statements are filed with regulators and are not the required point-of-sale disclosure. A certificate of authority licenses the insurer to transact business and is not delivered to prospects. (Outline I.B.)

   Reference FL 2-15 Outline I.B (Variable contracts disclosure)

5. An agent holds an active Florida 2-15 license, but her broker-dealer affiliation has been terminated and her FINRA registration is no longer active. Which business may she continue to write?

   • AVariable annuities only, because her Florida 2-15 license authorizes the sale of variable contracts on its own.
   • BBoth variable and fixed products, because in Florida the state license controls what she may sell.
   • CFixed life, fixed annuities and fixed indexed annuities only; variable contracts need active registration.Correct
   • DNo insurance business of any kind at all until her securities registration has been fully restored.

   Why: Variable contracts are dually regulated: the state license permits the insurance transaction, but the securities side requires an active FINRA registration held through a broker-dealer, so without it she cannot solicit or sell variable products. Option B is the classic error — a state license alone never authorizes a securities transaction. Option D overstates the consequence, because her state license remains valid for fixed products, which are not securities. (Outline I.B.)

   Reference FL 2-15 Outline I.B (Variable contracts licensing)

6. Which statement correctly distinguishes scheduled-premium variable life insurance from variable universal life?

   • AOnly variable universal life invests its cash value through a separate account rather than the general account.
   • BScheduled-premium variable life is not a security, while variable universal life must be registered with the SEC and sold with a prospectus.
   • COnly scheduled-premium variable life permits the owner to transfer cash value among the available subaccounts.
   • DScheduled-premium variable life has a fixed premium and a guaranteed minimum death benefit; variable universal life has neither.Correct

   Why: Scheduled-premium variable life keeps the fixed premium of whole life and guarantees the death benefit will never fall below the original face amount, while the cash value floats with subaccount results; VUL adds universal life's flexible premium but gives up that death benefit floor. Option A is wrong because both products use the separate account, and both are securities, which makes option B wrong as well. Subaccount transfers are available under both designs. (Outline I.B.)

   Reference FL 2-15 Outline I.B (Variable life and variable universal life)

7. After a strong market year, Alejandra moves $40,000 of her variable universal life cash value from an equity subaccount into a bond subaccount. What is the immediate federal income tax consequence?

   • AThe gain is taxed as a long-term capital gain in the year of the transfer.
   • BA 10% penalty applies because the transfer occurred before age 59 1/2.
   • CThe transferred amount is taxed as ordinary income under LIFO rules.
   • DThere is no current tax; transfers among subaccounts inside the policy are not taxable events.Correct

   Why: Cash value inside a life insurance contract grows tax-deferred, and reallocating among subaccounts is an internal transfer, not a distribution, so nothing is realized or reported. Option A is the closest distractor and treats the subaccounts like a taxable brokerage account, the most common misunderstanding. Taxation arises only when money leaves the contract through a withdrawal, surrender, or a loan from a modified endowment contract. (Outline I.B.)

   Reference FL 2-15 Outline I.B (Variable universal life taxation)

8. An indexed universal life policy uses a 70% participation rate, a 12% cap and a 0% floor. The linked index gains 10% during the crediting period. What interest rate is credited to the cash value?

   • A10%
   • B12%
   • C7%Correct
   • D0%

   Why: The participation rate is applied first: 70% of the 10% index gain equals 7%, which is below the 12% cap, so 7% is credited and the cap never comes into play. Option A ignores the participation rate, the most common error with these products, and option B wrongly credits the cap simply because it appears in the stem. The floor matters only when the index result is negative. (Outline I.B.)

   Reference FL 2-15 Outline I.B (Indexed life crediting)

9. An indexed universal life policy uses annual point-to-point crediting with annual reset, a 100% participation rate, a 10% cap and a 0% floor. The index falls 20% in year 1 and rises 15% in year 2. What interest is credited for those two years?

   • A0% in year 1 and 0% in year 2, because the index has not yet recovered its original starting value.
   • B0% in year 1 and 10% in year 2.Correct
   • C-20% in year 1 and 15% in year 2.
   • D0% in year 1 and 15% in year 2.

   Why: The floor limits year 1 to 0% despite the 20% index decline; annual reset then re-establishes the starting index value at the lower level, so the 15% year-2 gain is measured from that new base and is credited up to the 10% cap. Option D is the closest distractor because it applies the reset correctly but forgets the cap. Option A describes a point-to-point method without reset, where the prior loss must be recovered before any interest is credited. (Outline I.B.)

   Reference FL 2-15 Outline I.B (Indexed life crediting)

10. All of the following are true of an indexed universal life policy EXCEPT:

    • AThe insurer credits interest based on the movement of an external index.
    • BThe floor protects credited interest from a negative index year.
    • CThe policyowner receives the dividends paid by the stocks that make up the index.Correct
    • DCaps, participation rates and spreads limit how much of the index gain is actually credited.

    Why: Indexed universal life premiums go into the insurer's general account, and the insurer buys options to support the index-linked credit, so the policyowner never owns the underlying stocks and receives no dividends from them — one reason credited returns trail the index's total return. The other three statements accurately describe the product: an external index drives the credit, the floor prevents a negative credit, and caps, participation rates and spreads limit the upside. (Outline I.B.)

    Reference FL 2-15 Outline I.B (Indexed life)

11. In a year when the linked index is flat, Julio's indexed universal life policy is credited 0% index interest, and his annual statement shows the accumulated value went DOWN. What is the best explanation?

    • AThe insurer applied a negative index credit in spite of the contract’s stated floor.
    • BThe floor takes effect only after the tenth policy year has passed.
    • CMonthly cost of insurance and expense charges are still deducted at 0% credit.Correct
    • DThe participation rate was applied to the accumulated value a second time.

    Why: The floor guarantees only that index-linked interest will not be negative; it does not suspend the policy's monthly deductions, so in a 0% credit year the cost of insurance and expense charges reduce the accumulated value. Option A is the closest distractor and is the misconception the illustration should have prevented — the floor was honored, the charges simply exceeded the credit. This is why a 0% floor is not the same as a guarantee against loss of value. (Outline I.B.)

    Reference FL 2-15 Outline I.B (Indexed life charges)

12. Which combination of features identifies a variable universal life (VUL) policy?

    • AFlexible premiums, policyowner-directed separate-account subaccounts, and cash values that are not guaranteed.Correct
    • BFixed level premiums and cash values guaranteed by the insurer's general account.
    • CCoverage for a stated term with an option to renew at attained age.
    • DA single premium that immediately pays up the policy for life.

    Why: VUL combines the premium flexibility of universal life with the investment features of variable life: the owner allocates values among separate-account subaccounts, bears the investment risk, and has no guaranteed minimum cash value. Option B describes traditional or interest-sensitive whole life funded through the general account — the closest distractor because both are permanent products. Options C and D describe term and single-premium whole life. (Outline I.B.)

    Reference FL 2-15 Outline I.B (Variable universal life)

Drill the whole domain

• Florida Statutes — Life and Annuity (incl. Variable Products) (10%)
• Types of Life Policies and Features (10%)

Other topics

• Free look periods on the Florida 2-15
• Twisting vs churning vs sliding vs rebating
• Annuities on the Florida 2-15
• Medicare and Medicare supplement rules
• Life policy provisions and clauses
• Disability income insurance
• Annuity best interest rules for buyers 65+
• HIV testing and consent in Florida underwriting
• Premium trust funds and fiduciary duty
• Compulsory vs discretionary license discipline
• Buyer's Guide and Florida free look periods
• Florida guaranty association limits
• License, appointment and continuing education

See all topics · Study Guides · Full practice exam