Colorado Life Producer License Practice Test

A domestic insurer issuing variable contracts must establish one or more?

1. Separate accounts

2. General accounts

3. Mutual funds

4. Trust accounts

The correct answer is: Separate accounts

A domestic insurer that issues variable contracts must establish one or more separate accounts because these accounts are specifically designed to hold the assets that back the variable contracts. Unlike general accounts, which are used for traditional life insurance products and are subject to the insurer's general investment risks, separate accounts are segregated to facilitate the specific investment requirements and objectives associated with variable contracts. Variable contracts, such as variable life insurance or variable annuities, have benefits that can vary based on the performance of the investments made in the separate accounts. This structure ensures that the investment risks and returns are directly tied to the policyholder's choices, providing a clear boundary between the insurer's other financial obligations and the assets invested for the variable contracts. This regulatory framework is intended to protect consumers by ensuring that their investments are managed separately from other general funds used by the insurer, maintaining transparency and accountability in how the funds are handled.