Investment Company and Variable Contracts Products Representative (Series 6)Practice Exam

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What is the primary benefit of a 1035 Exchange?

Increased interest rates
Tax-free transfer of funds
Enhanced investment options
Lower management fees

The correct answer is: Tax-free transfer of funds

A 1035 Exchange primarily allows for the tax-free transfer of funds between insurance policies or annuity contracts. This provision in the tax code is particularly beneficial for policyholders who want to move their money from one policy to another while maintaining the same tax deferred status. It enables individuals to exchange a life insurance policy for another life insurance policy, or for an annuity, or to exchange one annuity for another without incurring immediate tax consequences. The option of increased interest rates, enhanced investment options, or lower management fees may be tangential advantages that could occur as a result of the exchange if the new policy offers these features, but they are not the defining benefit of a 1035 Exchange. The fundamental appeal lies in the ability to transfer funds without triggering a taxable event, making option B the most accurate choice.