How are protection costs handled under a variable life insurance policy?

Under a variable life insurance policy, protection costs are managed primarily through the cancellation of units in the investment fund and explicit charges. In this type of policy, the cost of insurance (COI) associated with providing the death benefit is taken out of the cash value by deducting a certain number of units from the policyholder’s investment account. This means that as these costs accrue, they directly affect the number of units allocated to the policy's cash value, which can affect the overall growth of the investment component.

The approach is designed to maintain flexibility in funding the insurance component, as the policyholder’s cash value is directly impacted by the performance of the underlying investments. This allows for a transparent way of delineating between the insurance costs and the potential growth of the investment portion of the policy, ensuring that policyholders can see how much of their premium is going towards protection versus investment.

This method contrasts with other possible options that do not accurately reflect how variable life insurance policies manage these costs. For example, increasing premiums annually or imposing flat charges does not provide the dynamic flexibility inherent in variable life policies. Reducing policy coverage over time may also misrepresent how costs relate to the value retained in a policy, as the original intent of variable life insurance is to