Fund switch (life insurance)
An operation by which the policyholder of a multi-fund contract moves savings from one investment option to another without leaving the contract, and so without immediate tax.
In a multi-fund life insurance contract, savings are split between a euro fund and unit-linked funds, equity, bond or real estate funds. A switch changes this allocation: selling units of one option to buy another, within the same contract. Its main advantage is tax: because the money does not leave the contract, a switch is not a surrender and triggers no taxation of gains, which will be taxed only upon an actual withdrawal. This is what allows a life insurance policy to be managed actively for decades without tax friction, an advantage an ordinary securities account does not offer. A switch may be free, at the policyholder's initiative, or automatic, under an option in the contract: locking in gains, stop-loss, gradual investment. It may also be fully delegated through discretionary managed allocation. Contracts often charge switching fees, as a percentage of the sums moved, and some restrict switches into the euro fund, or require a minimum share in unit-linked funds, to stop policyholders from using the guaranteed fund as a refuge at the worst moment for the insurer.
Hypothetical case: a policyholder holds 60 percent in equities and 40 percent in the euro fund. After a market rise, the policyholder switches 20,000 euros of equity gains into the euro fund: the gains stay in the contract, no tax is due, and they are now protected by the ratchet effect.
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