The differences between variable and fixed products are highly testable. The following five concepts sum up the key differences: 1. Licenses needed/regulated by 2. Assumption of investment risk 3. Separate Vs. general account 4. Variable contracts hedge against inflation 5. Prospectus required with sale of variable contract

The term variable contract encompasses variable life insurance policies and variable annuities. Variable contracts are insurance products, and as such, are regulated by the NAIC (Nat'l Association of Insurance Commissioners), who require an insurance license to sell these products. Variable contracts are also securities, and fall under the regulatory jurisdiction of the SEC. Therefore, to sell a variable contract, a Series 6 or Series 7 investment license is required as well as a life insurance license.

Separate Vs. General Account The assets in an insurance company’s general account are attachable by claims of the insurance company’s creditors. The premiums and cash values of traditional or fixed insurance products are held in the general account. If the insurance company becomes insolvent, those assets may be forfeited to the creditors of the insurance company. A separate account is an investment fund kept separate from the insurance company’s general account and is not attachable by creditors of the insurance company.

As required by the SEC, cash values of variable contracts are held in the insurance company’s separate account. **NOTE** 1) If it does not say VARIABLE in the title, you do NOT need an investment license to sell it. (i.e. Endowment, Market Value Adjusted Annuity, Equity Indexed Annuity, etc. 2) As required by the SEC, cash values of variable contracts are held in the insurance company’s separate account. *******************************

Assumption of Investment Risk A fixed contract is issued with the stated rate of return, 4% for example. If the insurance company is unable to earn 4% on the assets in the product, they lose money. Because a fixed contract has a guaranteed rate of return and the principal or cash value in a fixed product is also guaranteed not to decline, the insurance company assumes the investment risk. There are no guarantees as to rate of return or principal invested with a variable contract. The assets in a variable contract are invested in securities.

**NOTE** Client assets in a fixed or traditional insurance product are secured by the general assets of the insurance company; and are only as safe as the creditworthiness of the insurance company. *******************************

As the market value of the securities fluctuate, so will the value of the contract itself. The investor could lose some or all of their money. All variable contracts must be convertible into fixed contracts for at least 24 months from issuance to accommodate investors who may not have initially understood the risks associated with variable contracts.

Hedge against Inflation Historically, the stock market has outpaced inflation. Theoretically, over any extended period, the market value of publicly traded securities will increase with inflation. As a result, variable contracts offer a hedge against inflation. If inflation is high, the return of a variable contract should go up due to the increase in the value of the underlying securities. The owner of a fixed contract earning a fixed rate would have a negative “real return” (actually losing money) during a period where inflation exceeded the rate guaranteed by the contract.

Prospectus When an insurance company issues a variable policy or annuity (or any other issuer sells a security) the transaction is called a primary market transaction. Before securities can be offered to the public, a registration statement must be filed with the SEC. The registration statement announces the issuers’ intent to sell the security. Along with the registration statement the issuer files a copy of the prospectus with the SEC. The prospectus is intended to provide full and fair disclosure to the potential investor.

It is a formal written offer to sell securities which discloses facts investors need to make informed decisions. With the sale of a variable product, a prospectus must be delivered at time of solicitation prior to accepting premium.