What are the basic principles of the life insurance scheme?
To put it simply, life insurance is a financial investment allowing you above all to save money and to receive interest according to the rate of return of the contract and the capital invested. The advantages of this contract are numerous: highly flexible, it will provide you with advantageous taxation and secure transmission of your assets.
Traditionally, the objective of this contract is to transmit your capital and your interests to a beneficiary in the event of death or survival. In the event of survival, the subscriber – you – remains the beneficiary and will thus be able to recover the accumulated money. In the event of death, the capital and interest will be transferred to the beneficiary(ies) previously chosen by the subscriber. More generally, the life insurance contract is used as a tax-optimized investment portfolio. Its unrestrictive format which can accommodate several categories of investments makes it the real Swiss army knife of investments. You can also combine different life insurance contracts, it is not regulated unlike other savings products (the Livret A for example).
There is no contractual duration predefined by the law. It is up to you to determine the duration, namely that certain tax benefits are granted after 8 years.
The life insurance policy is subject to several kinds of fees, depending on your insurance company. The costs that may be invoiced throughout the contract are entry, file, management, and/or arbitration costs. These costs are deductible from the payments invested in your contract.
The different types of contracts
There are several types of life insurance contracts, depending in particular on the categories of investments you wish to include. Here are the main types of life insurance policies:
Euro contract
The contract in euros allows you to invest your savings in the form of funds in euros. It is mainly made up of bond investments as well as certain real estate, monetary, and equity investments. It is a mono-support contract since it is established on a single type of support; euro funds.
These funds are not subject to market fluctuations. It is therefore a type of secure investment since the risk of the capital loss is nil. However, by opting for this type of support, your return prospects will be limited.
Unit-linked contract
The unit-linked contract allows you to invest in the form of units of account, ie stocks, bonds, and units of other financial instruments.
The value of these funds varies this time according to variations in the reference market of the units invested.
Multi-support contract
The multi-support contract combines the two fund supports. A multi-support contract, therefore, consists of investments denominated in euros and units of account.
Namely: It is possible to include SCPI shares (also called paper stone investments ) in your life insurance. This would allow you to combine the advantageous tax framework of life insurance and the potential return of SCPIs.
Here is an example of what a multi-support life insurance contract may contain:
The different types of payments
Regarding the amounts paid into your life insurance account, also called premiums, you are given three options:
- The first option, fixed periodic premiums: The frequency and amount of payments are set by your life insurance contract. Most contracts provide that you can regularly update the frequency and amount of these payments, to adapt to your ability to save.
- The second option, premiums with free payments: Your contract provides for a minimum amount of premiums to be paid. It’s up to you to make your payments according to your financial capacities at the time.
- The third option, the single premium: You make a single payment when you take out the contract.
Note: If you opt for fixed periodic transfers, but you do not make the payments initially provided for in your contract, the insurer can take certain measures, after sending a registered letter with acknowledgment of receipt. In particular, he may reserve the right to dissolve the contract. Hence the importance of properly optimizing your investments to accurately define the monthly amount that you can allocate to this savings solution.
How to subscribe to a life insurance policy?
Any natural person can subscribe to a life insurance policy. There are not any special conditions related to age unless the insurer has determined an age limit. However, you must have the legal capacity to subscribe. Minors or adults under guardianship must therefore be accompanied. However, a contract may be drawn up in their name.
Namely: You have a right of withdrawal within thirty days after signing the contract.
The insurer, meanwhile, must advise and inform the subscriber. He also has a few obligations towards you, in particular, to give you a draft contract summarizing all the rights and obligations of both parties, and including a model waiver letter.
To be oriented towards the type of contract, the investments, and the terms that suit you best, you can get help from a wealth management advisor. This professional, unlike insurance companies, is neutral. He can then guide you objectively towards the solution that best suits your situation and your objectives.
What are the tax benefits of life insurance?
An advantageous tax framework
A specific tax framework applies to the life insurance contract. In the absence of any surrender, the proceeds accumulated on your life insurance policy are not subject to income tax. You should therefore not declare your payments to the public finance services until you make a buy-back.
Your earnings become taxable only when you redeem all or part of your life insurance. Or when the closing date of your contract expires.
Regarding the taxation of capital gains, several cases arise, depending on the chronology:
Capital gains resulting from premiums paid from September 27, 2017:
These capital gains are subject either to income tax or to the single flat-rate levy ( PFU ) depending on the option you have opted for. For redemption in the first 8 years of the contract, the single flat-rate deduction rate is set at 12.8%. After this period, the rate increases to 7.5%. This rate can remain at 12.8% depending on the number of premiums paid and the duration of the life insurance contract.
Capital gains resulting from premiums paid before September 26, 2017:
Depending on the option chosen by the subscriber of the contract, the products are subject either to income tax or to the lump-sum levy in the discharge of income tax.
- In the event of redemption before 8 years, capital gains are taxed at the rate of 35% (redemption before four years) or 15% (redemption between four and eight years) in the case of the flat-rate discharge. This option, therefore, does not allow you to benefit from the tax advantages that life insurance has to offer.
- In the event of redemption after 8 years, the rate increases to 7.5% with an annual allowance of €4,600 for a single person, in the case of the flat-rate deduction. This option is the one that is recommended when one is interested in life insurance.
Namely: In all cases, social security contributions apply, with a rate equal to 17.20%.
Life insurance as a gift and inheritance tool
One of the major advantages of life insurance is the security that this contract provides for the transmission of your capital.
First of all, life insurance allows you more freedom in choosing the beneficiary. Indeed, you are not obliged to choose a beneficiary who is one of your direct heirs.
In addition, whether your beneficiaries are direct heirs or not, they benefit from very attractive tax advantages within the framework of the succession. We can notably cite the allowance of €152,500 applicable to all beneficiaries without differentiation between the direct or non-direct heirs of the subscriber.
For example, if your beneficiary is none other than your spouse or PACS partner, he will not have to pay any inheritance tax.
To find out more about the following two subjects: tax advantages of marriage and PACS and taxes, please refer to the dedicated articles.
For beneficiaries who are no direct heirs, the premiums are not considered as an inheritance. Life insurance products are therefore not subject to the inheritance tax scale. They will be subject to another regime much more interesting. For more information on this one, do not hesitate to ask the experts.
In which cases can one benefit from a total exemption?
Capital gains may be exempt from income tax when redeeming the life insurance contract in certain situations of difficulty for the subscriber.
These can therefore be exempt following the loss of employment or the retirement of the subscriber or his spouse, for example.
Other cases allow total exemption of your life insurance earnings, in particular the cessation of any self-employed activity resulting from a judicial liquidation or even the recognition of a 2nd or 3rd category disability by Social Security.
frequently asked Questions
Do you have to declare life insurance for taxes?
The answer is no. Throughout the contract, you do not have to declare your payments to the public treasury, and you will not be taxed on these payments. On the other hand, as of the closing or the total or partial surrender of the contract, you must declare the capital gain realized thanks to your life insurance contract. You will then be liable for income tax on these profits.
Is life insurance tax deductible?
There are no tax deductions relating to individual or group life insurance. Life insurance allows you to benefit from the following tax advantages: a specific and advantageous tax regime on capital gains, reductions applicable to your beneficiaries, and advantages on inheritance tax and in certain cases total exemption when redeeming your life insurance contract.
Life insurance: What is the difference between a collective contract and an individual contract?
An individual contract is a contract taken out by a saver directly with an insurer. Thus, the insured and the insurer are directly bound by this contract, and the insured (you) can modify certain elements of his contract by discussing it directly with his insurer.
A collective contract is taken out by a legal person (company, association, etc.) with an insurance company. If you take out a group life insurance contract, you join the insurance company of the establishment to which you are attached. The establishment is then the only entity able to negotiate the clauses of the contract. If changes are made to the group life insurance contract by the insurer and accepted by the subscribing institution, the saver will then have no say. If these modifications do not suit him, he may nevertheless decide to terminate his contract.
Are the tax advantages of a group life insurance contract the same as for an individual contract?
Yes, savers who have taken out a group life insurance policy benefit from the same tax advantages and the same tax framework as savers who have taken out individual life insurance.
