For centuries life insurance has been first and foremost insurance: It provides a death benefit to the family or business partners of an insured person.
Beginning about 30 years ago, the attractive returns in stock investments led insurance companies to bring investment elements into life insurance policies. For example, agents and companies offered consumers the choice of placing life insurance premiums into mutual funds, stocks and bonds within the life insurance contract — known as “variable” life insurance. The term “variable” implies that the investment returns on these premiums vary with market performance.
With these types of life insurance policies, the insurance carrier takes the policyholder’s premium dollars and places them in the investment account(s) chosen by the policyholder. These types of life insurance policies are subject to state insurance regulation and federal and state securities regulations.
While investment-oriented life insurance has grown popular over the past generation, traditional life insurance (both permanent and term) continues to be purchased in large amounts. Americans purchased $3 trillion of new life insurance coverage in 2006, according to the American Council of Life Insurers.
If you are not sure whether a life insurance policy includes investment elements, you can check the disclosure information on a life insurance application or policy, which must discuss whether securities are part of the life insurance contract.