Financial Industry Regulatory Authority (FINRA) Practice Exam

In a variable life insurance policy, market risk is considered the greatest risk due to the nature of the investments underlying the policy. Unlike whole life insurance, which invests in fixed-income securities, variable life insurance allows policyholders to allocate premiums into various investment options, such as stocks and mutual funds. This means that the cash value and death benefits of the policy can fluctuate significantly based on market performance.

Market risk refers to the potential for loss due to changes in the overall market. Because the policyholder's returns are directly tied to the performance of these investments, a downturn in the market can significantly reduce the value of the policy, impacting both cash value and insurance benefits. Consequently, the policyholder bears the investment risk, which is not present in more conservative policies where the insurer assumes the investment risk.

While other risks, such as credit risk, inflation risk, and interest rate risk, may also apply to life insurance investments, they tend to have a less direct impact on the variable nature of such policies compared to market risk. The ability to invest in a volatile market environment inherently carries the most significant degree of risk for a variable life insurance policyholder.