What is the primary investment risk associated with variable life insurance policies?

The primary investment risk associated with variable life insurance policies is the risk of poor performance of the selected investment options. Variable life insurance allows policyholders to allocate their premiums among a variety of investment options, typically including stocks, bonds, and mutual funds. The value of the policy's cash value and death benefit is directly tied to the performance of these investments.

If the investments chosen perform well, the cash value can grow significantly, potentially providing both a larger death benefit and cash accumulation. Conversely, if the investment options underperform, the cash value and death benefit can decrease, which exposes the policyholder to market risks. Therefore, the investment risk inherent in these policies primarily relates to the fluctuations in the performance of the chosen investment options, making this the correct understanding of the associated risk.

Understanding this risk is crucial for policyholders as it influences their decisions on investment allocations and helps them to grasp the potential volatility of their policy's value over time.