All You Need to Know About VIP – Variable Insurance Product 2024

All You Need to Know About VIP – Variable Insurance Product 2024

By Karishma 10 June, 2024
All You Need to Know About VIP - Variable Insurance Product 2024

Brief overview of the blog’s purpose

The purpose of this blog is to provide a comprehensive guide to Variable Insurance Products (VIPs) for 2024. It aims to educate readers about the fundamental aspects of VIPs, including their features, benefits, risks, and considerations. By breaking down the complexities of these products, the blog seeks to empower individuals to make informed decisions regarding their life insurance and investment needs. Whether you are considering purchasing a VIP or looking to understand your existing policy better, this blog serves as a valuable resource to help you navigate the nuances of VIPs and optimize your financial planning strategies.

Understanding VIPs is crucial for several reasons:

Informed Decision-Making : Grasping the complexities of VIPs helps tailor policies to personal financial goals and risk tolerance.
Financial Growth and Security : Knowledge of investment options and death benefits ensures potential for wealth accumulation and protection for beneficiaries.
Risk Management : Awareness of market risks and fees allows for strategic adjustments to minimize losses and expenses.
Tax Advantages : Understanding tax-deferred growth and withdrawal implications maximizes tax benefits.
Regulatory Compliance : Being informed ensures adherence to regulations and effective advocacy for policyholder rights.
Long-Term Planning : VIPs are vital for retirement and estate planning, aiding in creating a secure financial future.
Preview of key topics covered in the blog

What is a Variable Insurance Product (VIP)?

A Variable Insurance Product (VIP) is a type of life insurance policy that combines death benefits with investment options. Policyholders allocate a portion of their premium payments to a variety of investment sub-accounts, similar to mutual funds, which can include stocks, bonds, and money market instruments. The cash value and death benefit of the policy can fluctuate based on the performance of these investments. VIPs offer potential for growth, flexibility in investment choices, and tax advantages, but they also come with risks and fees associated with the investment component.

SEC adopted rule 498A under the Securities Act, aiming to help investors make informed decisions on variable annuity and life insurance contracts.

On March 11, 2020, the Securities and Exchange Commission announced the adoption of new rule 498A under the Securities Act to help investors make informed investment decisions regarding variable annuity and variable life insurance contracts. Rule 498A adopts certain provisions regarding information made available to investors, including amendments to registration Forms N-3, N-4, and N-6, which are intended to improve the content, format, and presentation of information to investors. In addition, the Commission adopted amendments to require the use of Inline XBRL for the submission of certain required disclosures in the variable contract statutory prospectus.

Comparison to Other Insurance Products

Whole Life Insurance :
Stability : Guaranteed growth and benefits.
VIP Advantage : Greater investment control.

Term Life Insurance :
Duration : Temporary coverage.
VIP Advantage : Lifelong coverage with investment options.

Universal Life Insurance :
Flexibility : Adjustable premiums and death benefits.
VIP Advantage : Higher growth potential through market investments.

Indexed Universal Life Insurance (IUL):
Growth : Tied to market indices with caps and floors.
VIP Advantage : Direct investment options for potentially higher returns.

Evolution of Variable Insurance Products (VIPs)

1970s Introduction: VIPs emerged in response to inflation, offering life insurance with investment components.
1980s-1990s Growth: Regulation and market expansion led to increased popularity and diversity of VIPs.
Modern Era: Ongoing evolution with advanced technology and regulatory changes for transparency and consumer protection.

IXBRL requirement for VIP tagging

Securities and Exchange Commission (SEC) adopted a proposal and released a taxonomy for changes to the Variable Insurance Product (VIP) disclosure requirements. VIP taxonomy details the concepts and structures required to create an iXBRL package for a filing.

Similar to mutual fund iXBRL tagging, only a summary section of the variable insurance product disclosure would be tagged. This summary disclosure would be tagged beginning with the first filing after the registration statement becomes effective. The tagged sections would include the most important data used by investors to make their investment decisions. Sections tagged would slightly vary based on which type of insurance product is being tagged.

Form N-3 Form N-4 Form N-6
Item 2. Key Information Item 2. Key Information Item 2. Key Information
Item 4. Fee Table Item 4. Fee Table Item 4. Fee Table
Item 5. Principal Risks Item 5. Principal Risks Item 5. Principal Risks
Item 11. Benefits Available Item 10. Benefits Available Item 10. Standard Death Benefits
Item 11. Other Benefits Available
Item 18. Investment Options Available Item 17. Portfolio Companies Item 18. Portfolio Companies
Item 19. Additional Information About Investment Options

While cover page tagging would not be required for these filings, the identifying document entity information would still be. These fields include Registrant NameCentral Index KeyAmendment FlagAmendment Description (if AmendmentFlag is true), Document Type, and Investment Company Type.

Another similarity to mutual funds is that the same six iXBRL exhibits are included in the filing.  All six of these exhibits are required for Form N-3 iXBRL filings, but N-4 and N-6 filings do not require a calculation linkbase.

Variable insurance product tagging also allows for inline tags to be nested to capture several facts within the same sections. This means that entire sections will be tagged using a text block-level concept, tables will have a table text block tag, and each fact or excerpt with the text block or table will also be tagged using the more detailed concept.

On January 1, 2022, the updated disclosure requirements for Variable Insurance Products (VIP) filers went into effect. This change forced filers to format their initial registrations, annual updates, and post-effective amendments in a more consistent manner. On January 1, 2023, the inline XBRL (iXBRL) tagging requirement for those filers will go into effect. These changes mark a significant change for N-3, N-4, and N-6 filers, many of whom have never dealt with iXBRL in any of their filings.

Our Transform platform has been upgraded to support the iXBRL tagging for VIP projects. We have designed an easy-to-use system to tag, validate, and submit your filing to the SEC all in one place. Our platform is designed to guide any user through what sections should be tagged and which concepts are available from the VIP taxonomy.

Summary Recommendations

We strongly support the Commission proposal to require data about variable annuities in structured, machine-readable format using Inline XBRL. The detailed information that investors need to understand about variable annuity and life insurance products can be rendered substantially more transparent and understandable, if available in structured format. The transition to Inline XBRL, however, will be difficult for reporting entities because of certain common document preparation practices that have evolved to reduce filer burden, and because of the limitations of the SEC EDGAR System. Based on an understanding of these issues, we make the following recommendations for the Commission to consider in preparing the final rule:

1. All variable contract and life insurance companies should be required to submit data using Inline XBRL. To ensure that investors have access to consistent, comparable data about investment products, every company must be required to report in structured format. No phase-in for subsets of companies (for example, small companies versus large) should be allowed.

2. Companies will need additional time to make the transition. We recommend that the Commission extend the lead time to 24 months (rather than 18 as currently proposed). Many companies take advantage of the ability to submit a single filing in multiple sections (modules). This practice, combined with limitations in the EDGAR System that preclude the submission of modules in HTML or XHTML format, will add challenges to the transition to XHTML (Inline XBRL). These issues will require extra time to work through, both for the SEC and the reporting companies.

3. The Commission should consider requiring additional financial data beyond what is included in the proposal to further benefit investors. There are additional value drivers reported about variable annuities that would further facilitate product comparisons and aid in investment decisions.

Key Features of VIPs in 2024: Flexibility and Customization

Flexibility: VIPs offer policyholders the flexibility to allocate premiums among various investment options based on their risk tolerance and financial goals.
Customization: Policyholders can customize their investment portfolios within VIPs to suit their individual preferences, allowing for tailored wealth accumulation strategies.

Investment Options in VIPs

Stocks : Equity investments for potential high returns.
Bonds : Fixed-income securities for stability and steady income.
Money Market Instruments : Low-risk, short-term investments for liquidity.
Mutual Funds : Diversified portfolios for balanced risk and return.
Premium structure
Death benefits and living benefits

Factors to Consider in VIP Investing :

Financial Goals :
     o Align investments with specific objectives.

Risk Tolerance :
     o Match investments with comfort level for market fluctuations.

Investment Horizon :
     o Tailor strategies based on time frame for goals.

Diversification :
     o Spread investments to manage risk.

Tax Considerations :
     o Understand tax implications for optimal planning.

Costs and Fees :
     o Evaluate impact on investment returns.

Market Conditions :

How VIPs Work

Mechanism of premium payments

How VIPs Work : Premium Payments

Setup :
     o Choose investments (mutual funds, ETFs, stocks, etc.).
     o Decide contribution amount and frequency.
Automatic Transfers :
     o Link your bank account.
     o Regularly deduct the predetermined amount.
Investment Allocation :
     o Invest in chosen assets proportionally.
     o Buy units/shares, leveraging dollar-cost averaging.
Flexibility :
     o Adjust contribution amount and frequency.
     o Pause or resume payments as needed.
Monitoring :
     o Receive regular statements.
     o Track performance and adjust as needed.
Fees :
     o Pay applicable management and transaction fees.

Advantages of VIPs for Higher Returns
Diverse Investments:
     o Access to stocks, bonds, and funds.
Expert Management:
     o Professional management maximizes returns.
Dollar-Cost Averaging:
     o Smooths market volatility for higher returns.
Compounding Growth:
     o Reinvested dividends amplify returns.
Tax Benefits:
     o Tax-deferred growth boosts overall returns.
Flexibility:
     o Easily adjust investments to match goals.

Tax Benefits of VIPs

Tax-Deferred Growth :
     o Gains taxed upon withdrawal.
Tax-Free Withdrawals :
     o For qualified expenses.
Tax Efficiency :
     o Lower tax rates on gains.
Estate Planning Advantages :
     o Potential tax-free transfers.
Tax Deductions :
     o Contributions may be deductible.

Risks and Considerations

Market Risk and Volatility

Market Risk :
     o Potential for investments to decline due to market trends.
Volatility :
     o Fluctuations in investment values.
Impact on Returns :
     o Higher risk and volatility lead to greater return fluctuations.
Diversification :
     o Spreading investments helps mitigate risk.
Long-Term Perspective :
     o Tolerating short-term volatility for potential long-term gains is crucial.

Fees and Expenses in VIPs

Management Fees :
     o Percentage of assets managed.
Administration Fees :
     o Fixed annual cost.
Transaction Fees :
     o Charged for buying or selling.
Surrender Charges :
     o Applied for early withdrawals.
Underlying Fund Fees :
     o Costs within mutual funds or ETFs.

Policy Lapses and Surrender Charges

Policy Lapses :
     o Coverage loss due to missed payments.
Surrender Charges :
     o Fees for early termination.
     o >Decrease over time.

Regulatory Changes and Updates in 2024

Impact on Policyholders and Insurers :
Policyholders :

Costs and Fees : Potential changes in fees and charges.
Product Offerings : Influence on available VIP products.
Investment Options : Changes in investment choices.
Disclosure Requirements : Clearer information about fees and risks.
Consumer Protections : Enhanced safeguards for policyholders.

Insurers :

Compliance Costs : Increased costs for regulatory adherence.
Product Development : Adjustments to comply with regulations.
Risk Management : Reassessment of risk frameworks.
Market Competition : Adaptation to evolving market dynamics.
Customer Relations : Improved communication of regulatory changes.