FINRA Series 6 Investment Company and Variable Contracts Products Representative ExaminationProcessing Customer Orders and TransactionsMedium
A client with a variable life insurance policy wants to transfer funds between subaccounts. Which of the following statements is TRUE regarding this transaction?
- ATransfers are typically limited to four per year without charge.
- BTransfers between subaccounts within the same policy are generally not taxable.
- CTransfers are generally subject to current income tax on any gains.
- DTransfers usually require the approval of the insurance company's underwriting department.
Show answer & explanationAnswer & explanation
Correct answer: B. Transfers between subaccounts within the same policy are generally not taxable.
Transfers between subaccounts within the same variable life insurance policy (or variable annuity) are generally considered non-taxable events. This is one of the key benefits of these products, allowing for tax-deferred growth and rebalancing without immediate tax consequences.
Why the other options are wrong
- A. While some contracts might have limits or fees for excessive transfers, there is no universal 'four per year' rule, and the primary benefit is tax-free transfers.
- C. This is incorrect; transfers within a variable life policy are generally tax-free.
- D. This is incorrect; transfers are typically initiated by the policyholder and do not require underwriting approval, which is for initial policy issuance or changes to coverage.
Variable Contract Subaccount Transfers
The movement of funds between different investment options (subaccounts) within the same variable annuity or variable life insurance policy.
- Generally a non-taxable event.
- Allows for portfolio rebalancing.
- May be subject to certain fees or frequency limits by the issuer.
Memory trick: Internal transfers are 'Tax-Free' moves within your policy's 'House'.