What is true regarding the risk of investing in variable life funds?

The statement regarding variable life funds that accurately reflects their nature is that policy owners may face higher risk but can expect higher returns. Variable life insurance (VLI) policies allow the policyholder to allocate a portion of their premiums to investment options, often including equities, bonds, and mutual funds. As these investments are subject to market fluctuations, the value of the cash value and death benefit can vary significantly.

This means that while there is a potential for substantial growth due to higher-risk investments, such as those in the stock market, there is also the possibility of loss. The expectation of higher returns arises from the inherent risks associated with equity investments, which historically have provided greater returns over the long term compared to fixed income or cash-equivalent instruments. Thus, policyholders who opt for variable life insurance must be comfortable with this risk-return trade-off and understand that their investment choices can lead to varying outcomes based on market performance.