General Securities Sales Supervisor (Series10) Practice Exam

Why are whole life policies not considered securities under the Securities Act of 1933?

1. They do not provide any returns to the policyholder

2. Investment risk is not assumed by the purchaser

3. They are not tradable in secondary markets

4. They are insured by government entities

The correct answer is: Investment risk is not assumed by the purchaser

Whole life policies are not considered securities under the Securities Act of 1933 primarily because investment risk is not assumed by the purchaser. In the context of whole life insurance, the policyholder pays regular premiums in exchange for a guaranteed death benefit and potentially a cash value component. The insurance company bears the investment risk associated with the cash value accumulation, meaning the policyholder is not exposed to market fluctuations that would typically be present in a security. This fundamental characteristic aligns whole life policies more closely with insurance products rather than securities, which inherently involve risk for the investor. The characteristics of whole life policies—such as their structure, guaranteed benefits, and the company's obligation to fulfill those guarantees—indicate that the purchasers do not assume the risks typically associated with securities, such as the potential for loss of principal. This distinction is vital in regulatory terms and influences how these products are classified.