Which of the following statements is true regarding variable life insurance?

Variable life insurance is designed to provide both a death benefit and a cash value component that can fluctuate based on the performance of underlying investment options chosen by the policyholder. This means that the cash value can grow — or shrink — depending on the success of these investments, which typically include stock and bond funds. By linking the cash value to market performance, policyholders have the potential for higher returns compared to other types of life insurance with guaranteed cash values, such as whole life.

This characteristic of variable life insurance aligns with investment principles, allowing the insured person to take on more risk in pursuit of greater rewards. Consequently, while the potential for growth exists, it also implies a risk of loss, reflecting the inherent volatility of the financial markets. This understanding of variable life insurance is crucial for policyholders, as it emphasizes the importance of their investment choices and market conditions in determining the policy's value over time.