FINRA Series 6 Investment Company and Variable Contracts Products Representative ExaminationProcessing Customer Orders and TransactionsHard
A client with a variable life insurance policy wants to transfer funds from one subaccount to another. Which of the following statements is TRUE regarding this transfer?
- ASuch transfers typically result in a taxable event.
- BTransfers between subaccounts are usually tax-free.
- CA sales charge is always assessed on each transfer.
- DTransfers are limited to once per calendar year.
Show answer & explanationAnswer & explanation
Correct answer: B. Transfers between subaccounts are usually tax-free.
One of the key benefits of variable life insurance and variable annuities is the ability to transfer funds between subaccounts without incurring a taxable event. This is due to the tax-deferred growth within the contract. While there might be administrative fees or limits on the number of free transfers, a sales charge is not typically assessed on internal transfers, and they are not inherently taxable.
Why the other options are wrong
- A. This is incorrect. A major advantage of variable contracts is tax-free transfers between subaccounts.
- C. Sales charges are typically associated with initial purchases or redemptions (CDSC), not internal transfers between subaccounts.
- D. While some policies may have limits on the number of free transfers, a blanket 'once per year' limit is not universally true or a defining characteristic.
Variable Contract Subaccount Transfers
Transfers of funds between subaccounts within a variable life insurance policy or variable annuity are generally tax-free events.
- Allows investors to reallocate assets without tax consequences.
- Some contracts may impose limits on free transfers or small administrative fees.
- This is a key advantage of the tax-deferred nature of variable contracts.
Memory trick: Subaccount Swap? Sweetly Tax-Free!