How does life insurance work? Here is a comprehensive guide to the most common questions.
Unmatched asset management tool but also multifunctional investment, life insurance remains the most popular savings product for French households.
However, life insurance remains relatively unknown to savers, especially on everything relating to the multiplicity of its uses, choosing the right contract according to its needs or even the subtleties of the taxation applicable to it.
In addition to these concepts, this guide also addresses the most common questions that savers ask themselves about their contract: how to navigate between the different supports available and on which to invest, why the return on support in euros decreases year after year , understand the interest of the beneficiary clause, how to tap into a contract by controlling the tax parameter.
The guide is also interested in the evolution of contracts desired by the public authorities and the addition of new supports such as euro-growth or private equity and their interest for savers.
How does life insurance work?
Legally, it is a contract concluded between an individual (the subscriber) and a financial intermediary (a bank or an insurance company). We also often hear the term insured in the contract. It is in fact the person whose death conditions the payment of the capital by the insurer. Usually, the policyholder and the insured are the same person.
Finally, the beneficiary of the contract must be mentioned, who is the person designated by the subscriber of the contract to receive the capital in the event of the death of the insured. The beneficiary can also be a legal person (association or foundation). The payments made on the contract by the subscriber can be invested in different types of financial products. Basically, we must distinguish two main categories of support: the fund in euros , very secure, in which the subscriber is guaranteed to recover the amounts he has invested.
It is also possible to invest in units of account whose value development is linked to the financial markets. If this support is riskier than the euro fund, it can deliver a higher performance than that which would be obtained on the euro fund. It is possible to mix your payments on the two categories of media.
There are two types of life insurance contracts on the market. Historically, the first ones that were marketed only allowed investing in the euro fund. We are also talking about single-support contracts. Contracts allowing access not only to funds in euros but also to units of account appeared later. They are called multi-support contracts. This is the type of contract most commonly offered by different distributors (banks, insurance companies, internet brokers, wealth management advisers, private banking)
What are the advantages of life insurance?
Life insurance is a multifunctional savings product that allows you to grow capital, build up precautionary savings or prepare for retirement .
It is also an unparalleled asset management tool since it allows capital to be transferred outside the framework of the succession to people that the subscriber will have designated in the contract by means of the beneficiary clause.
Even if these are most often members close to the subscriber (children, grandchildren, spouse), it is possible to designate people outside the family circle. The sums are transmitted in a particularly advantageous fiscal framework, since they are exempt from tax below 152,500 euros per beneficiary. Another plan applies to premiums paid by the subscriber after his 70th birthday. In this case, the payments are exempt from inheritance tax up to 30,500 euros. The interest generated by the payment of premiums, however, is exempt from taxation.
This multifunctional aspect explains why life insurance is one of the favorite products of the French, after real estate.
In 2018, the total outstanding life insurance contracts exceeded 1.700 billion euros. Note that we often confuse life insurance and death insurance. While the first is a savings product, the second relates to the field of provident funds.
Death insurance works on the principle of annual payment by the subscriber of a contribution, which will change according to his age, and in return for which the insurer undertakes to pay a capital to the persons designated upon the death of the subscriber.
How to choose life insurance?
Due to its success, life insurance is subject to fierce competition between different distributors. You can take out a contract in a bank branch, with a general insurance agent, a mutual insurance company, a savings association or a wealth management advisor. Private banks also offer them. Finally, it is possible to subscribe without leaving home thanks to the rise of online contracts.
Each network displays its specificities. Thus, bank branches represent a not insignificant part of life insurance collection. The products are very varied and are supposed to meet the needs of different customer segments (young workers, affluent customers, wealthy people). They should be compared carefully because they can turn out to be charged with costs with financial performances which do not allow these costs to be offset. The fund offer often gives pride of place to media marketed only by the bank’s management company.
The contracts offered by savings associations or mutuals have funds in euros which show good performance over the long term. Less charged in costs than banking contracts, however, they suffer from a financial offer that is often less extensive than other distributors. Internet contracts do not charge entry fees and offer an extensive financial offer. However, they require a certain autonomy on the part of the subscriber who will have to accomplish all of his procedures from his computer.
What are the costs of life insurance?
Fees on installments, management or arbitration. Taking out a contract is an opportunity to pay multiple costs to the insurance company . You have to know how to evaluate them precisely to assess the performance of a life insurance contract. They vary from one contract to another.
The fees on installments, also called entry fees, are deducted when the subscriber makes a new payment on his contract. Non-existent in online contracts, they can fluctuate between 1% and 3.5% within other distribution networks. They are very often negotiable downwards, especially if the subscriber pays a large sum on his contract. Sometimes, but it is increasingly rare, there are administrative fees linked to the opening of the contract. The good news is that these fees are only taken once at the time of purchase.
The management fees are deducted each year throughout the duration of the contract. They relate to the total amount invested (less any payment charges) and the interest they have generated. Their basis of calculation is therefore required to progress over time as the outstanding amount increases. We must therefore ensure that they are not too important. They are generally between 0.40% and 1.5%, all media combined (euro funds and units of account) and are fairly consistent from one distributor to another. They are often higher on units of account than on the euro fund.
When the subscriber decides to modify the distribution of his savings, by transferring it to another medium in the contract, he must generally pay arbitration fees. Each insurer decides on the billing method: some proceed by flat rate or as a percentage of funds arbitrated. Some contracts work both ways. More and more online contracts make them free and therefore no longer charge their customers for them.
What should I check before subscribing?
It is often more interesting to take out an accessible life insurance contract, that is to say one that allows you to invest from a hundred euros in order to easily create a saving habit.
Nothing prevents the subscriber from subsequently modulating his payments with larger amounts. The costs taken in the contract are also important. Lightly loaded contracts are also contracts that allow you to invest more and ultimately obtain more profitability.
But there is no martingale. To assess the weight of the costs on the contract, the subscriber will have to sift through them and measure the respective weight of the costs within each of them. To get an idea, the method of multiplying the management fee rate by the number of years considered for the contract is interesting. Do not forget to add the amount of the entrance fees.
The profitability of the contract is also essential. The subscriber should consult the specialized press and look at the performance of the fund in euros over several years. The unit-linked component must also be expanded in the contract in order to allow good diversification over the long term.
The management methods proposed must also attract the attention of the investor. The more there are, the more they allow to develop long-term strategies.
Can we build up precautionary savings with life insurance?
If in principle, life insurance is a product intended for the long term, it is quite possible to use it for the purpose of building up precautionary savings.
First of all, because the money invested in life insurance is never blocked. Then because unlike a regulated passbook which is always capped, life insurance has no deposit limit.
It is therefore quite possible to use this envelope to cope with a hard blow or to pay cash in order to finance another medium-term project.
However, two things must be taken care of. First, if it is a question of building up savings that can be mobilized in the short term, it is preferable to invest in the risk-free medium of the contract, namely the fund in euros.
Second, you have to take into account taxation. Life insurance has specific taxation.
The gains produced by the contract may be subject to the income tax scale or, at the option of the taxpayer, to a flat-rate deduction the rate of which decreases as the contract lasts. A withdrawal before four years results in the highest tax. It decreases during a withdrawal made between four and eight years. Beyond eight years, the subscriber benefits from an annual allowance which allows him to withdraw sums in an almost tax-exempt manner.
Note also that the introduction of the levy Lump Unique (PFU) of 30% also applies to life insurance products to gains on payments since September 27, 2017 and which were removed from 1 st January 2018. The impact of taxation on withdrawals should therefore be carefully calculated by the subscriber. He can also ask his insurer for simulations to get an idea of their impact.
How long is life insurance?
First observation, life insurance has no legal duration. The unwinding of the contract ends with the death of the subscriber, which results in the payment of the capital to the designated beneficiaries. During the subscriber’s lifetime, the latter can also terminate his contract by carrying out a total surrender, that is to say, he recovers the sums which have been placed there.
Second observation, we often hear that with life insurance, money is blocked for 8 years. This is a received idea because savings can be mobilized at any time. The 8-year term corresponds in practice to its fiscal maturity. Beyond 8 years of detention, redemptions made on a contract are little taxed.
After application of an annual allowance on earnings of 4,600 euros (9,200 euros for a married or civil partnership), the fraction of the sum withdrawn greater than the allowance is taxed either in income tax or at the option of the taxpayer. to the withholding tax at the rate of 7.5%.
In the case of contracts that have been subject to payments made after 27 September 2017 and which cause withdrawals since 1 st January 2018, the withholding tax of 7.5% applies up to 150,000 euros of payments ( all contracts combined). Beyond this amount, the single flat-rate levy of 12.8% applies.
In general, however, it is advisable to keep a life insurance contract over several years in order to amortize the entry costs, when there are any.
Does life insurance go into the estate?
One of the specificities of life insurance and which explains its success with households is that it is an investment outside inheritance. In other words, the capital paid by the insurer to the designated beneficiaries does not have to be taken into account when settling the subscriber’s estate.
They do not enter into the estate of the deceased and are not used in the calculation of the hereditary reserve if there are heirs identified in the succession. However, this principle has limits. When the premiums paid by the subscriber on his contract are “manifestly exaggerated” in relation to his financial capacities or his patrimony, the heirs reserving (the children or failing the grandchildren or the spouse) can call into question the payments made in invoking an infringement of the hereditary reserve and requesting their reinstatement in the estate.
The principle is that the subscriber cannot disinherit his children through life insurance by designating another person as the sole beneficiary. The assessment is made on a case by case basis by the judges. They take into account the size of the payments compared to the level of the subscriber’s income, his assets, his age, and his family situation at the time of payment of the premiums.
What is the beneficiary clause used for?
Life insurance is non-inheritance because the capital is transferred to designated beneficiaries. This is why they do not enter into the patrimony to be shared between heirs.
The designation of beneficiaries is left to the discretion of the subscriber. He can of course decide to appoint his heirs who will then be able to obtain more than what is provided for by inheritance law. But it can also reward a third party who is not one of his heirs or a legal person (association, foundation) or even the Public Treasury if the capital is to be used to settle inheritance taxes in place of the heirs.
It is however prohibited to designate as beneficiaries the professionals and health auxiliaries who have treated the subscriber during his end of life. Same prohibition on the owners and staff of a retirement home where the subscriber was accommodated before dying.
It should be noted that it is possible to designate several beneficiaries within the same contract. Insofar as the subscriber is not limited in the number of life insurance contracts that he can open, he can also designate a single beneficiary per open contract.
The subscriber can change beneficiary whenever he wishes, provided that the latter has not accepted the benefit of the contract. In this case, the beneficiary is aware of his designation and indicates it to the insurer. However, he must obtain the agreement of the subscriber to do so. If accepted, the subscriber can no longer change the beneficiary without the consent of the beneficiary. More restrictive, if the subscriber decides to make redemptions on his contract, he must also obtain the agreement of the beneficiary.
The designation can take several forms: by simple letter, by an amendment to the contract, by mention completed in the contract signed by the subscriber or even by will or notarial deed. The drafting of the beneficiary clause is an important moment. Because in his absence, the capital on the contract returns to the subscriber’s estate, which loses his interest in having taken out a contract.
It should be noted that the contracts propose by default a standard beneficiary clause which designates the spouse, failing which the children born or to be born, alive or represented than in last line the heirs. This is called a cascading clause. While this is the most common way to designate beneficiaries, it is not the only one. It is possible to customize it to match the subscriber’s situation as closely as possible. In this case, it is preferable to use the services of a legal professional (notary, lawyer) or to seek the legal service of the insurance company.
What is the difference between units of account and the euro fund?
In life insurance, the sums paid can be placed on two types of media: funds in euros and units of account. Traditional euro funds are mainly invested in bonds. A small part of the insurer’s portfolio is invested in equities or real estate. They are called funds in euros, or funds in euros because their value is expressed in euros and not in the number of units as is the case for units of account.
The main advantage of euro funds is their great security. The insurer is obliged to reimburse the sums paid by the subscriber plus the interest produced by the investment. This characteristic is also referred to as a “ratchet effect”.
However, given their limited earnings prospects (they reported on average 1.80% in 2018), insurers have tended in recent years to offer several within their contract offering.
Some funds in euros are said to be “dynamically managed” and include a larger equity pocket than a traditional fund in euros. This greater diversification also makes them more volatile, which is reflected in their saw-tooth performance from year to year.
Other funds are also more specialized in real estate assets. Their returns benefit from the good results of this asset class in recent years. But insurers are restricting their access and in return ask for greater diversification on unit-linked accounts, which is not necessarily the case for all market players.
In general, the sums invested in funds in euros produce interest which is calculated on the basis of the profit-sharing generated by the insurer. If they are not distributed in full, which the insurer has the legal right to do, they are provisioned and set aside in what is called, in the accounting jargon of insurance, the Provision for Participation in Profits (PPB). The insurer has the obligation to return them to the insured within a maximum period of eight years. Interest is paid annually on December 31 to subscribers. They are calculated pro-rata temporis, that is to say, according to the investment period of the subscriber.
At the other end of the spectrum, units of account (UC) follow a different logic. CUs are invested in financial markets and therefore their value may go up or down.
Unlike euro funds, they do not offer a guarantee on the invested capital. They are above all intended for people ready to accept a certain dose of risk. Between 2012 and 2016, the average return on units of account stood at 6.6%. On the contrary, at the end of 2018 their average performance was negative (-5.9%) due to a complicated situation on the markets. In the long term, UCs are supposed to bring in more than what would have been paid into the euro fund alone.
It is always possible for the subscriber to mix his investments between the fund in euros and the units of account in order to stick as closely as possible to his investor sensitivity.
Why is the return on euro funds falling?
This is a movement that began in the early 2000s. The returns on euro funds are falling year after year. While the average return net of fund management fees stood at 5.1% (4.3% adjusted for inflation) in 2000, it fell to 1.80% (0.8% adjusted for inflation). ) in 2018.
Several reasons can be given to explain this decrease. The first is due to the fact that the assets that make up euro funds are essentially government bonds.
In recent years, interest rates on government bonds have fallen sharply. By way of illustration, the 10-year interest rate on French government bonds has been close to 0.80% for several months. Under these conditions, finding yield on the bond markets has become more difficult for insurers. The second reason is due to the change in accounting standards in insurance (this is called Solvency 2 jargon).
These regulatory constraints have constrained the management of insurers by limiting their possibility of going into riskier and potentially more profitable assets.
Finally, the last reason is due to an injunction from the gendarme of insurers, the Prudential Control and Regulation Authority (ACPR), which encouraged market players, in this persistent context of low-interest rates, to strengthen their reserves through of the Provision for Profit Sharing (PPB), and therefore moderate the returns served to policyholders.
What are the different management methods?
A life insurance contract leaves a great deal of autonomy to the subscriber in his choices. He can freely choose the beneficiaries of the contract. He is also free in the manner of investing in the various accessible supports, whether it is the euro fund (s) but also the different units of account offered by the insurer in its financial offer. The same goes for management.
The subscriber can decide to manage his contract on his own. This is called free management. The subscriber decides for himself the level of distribution between the different media according to the strategy he himself has defined.
Direct management is also flexible: it can be modified at any time by using the possibilities of arbitrage, that is to say the ability to change the investment medium within the contract. Unlike withdrawals or redemptions which are subject to taxation, arbitrations do not result in the payment of tax. However, they may be billed by the insurer depending on the contract chosen by the subscriber.
For people who don’t know which funds to choose, the vast majority of contracts incorporate streamlined management. It corresponds to different investor sensitivities.
The cautious profile favors investment in the euro fund. The use of CUs remains very limited. In a balanced profile, investment in equities is higher than the prudent profile, but at least half of it is secured on the euro fund. Finally, the dynamic profile relies on investment in shares. The risk of capital loss is therefore higher there than on the other two profiles.
In streamlined management, it is the insurer who selects the funds in which it will invest. It is also he who carries out the necessary arbitrage to maintain the risk profile chosen by the subscriber. Another mode of management, called managed management or management under the mandate, is also available in certain contracts.
By choosing this option, the subscriber entrusts the management of his savings to a management company independent of the insurer. It is the latter that will determine the level of risk accepted according to the objectives that you have indicated. It is the manager who will then take care of the choice of funds and the arbitrations to be made. Generally more expensive than streamlined management, managed management is more accessible in the contracts offered on the internet.
What are the criteria for choosing units of account in a life insurance contract?
The financial offer differs from one contract to another. While some contracts only offer ten units of account (UC) others offer several hundred. When you opt for free management, it is then more difficult between which funds to distribute your investments.
There are UCs invested in low-risk but low-paying monetary supports or in stocks or bonds that present more potential but also more risk. It is also possible on supports backed by real estate assets, such as the Civil Real Estate Placement Companies (SCPI) or the Collective Real Estate Placement Organizations (OPCI). The latter are more and more referenced in the various life insurance contracts offered on the market.
Certain CUs are also constituted in the form of diversified funds which mix the aforementioned supports. It is the fund manager who mixes the media. CUs are also subdivided into investment universes which are themselves divided into multiple sub categories. It is possible to invest on geographic criteria (European, American or Asian equities). Sectoral (energy, finance, distribution) or thematic criteria can also be put forward in the contracts.
The advantage of having a wide choice is to be able to distribute the risk exposure among the different investment universes in a homogeneous manner. Each fund offered in a contract has its KIID (Key Investor Information Document) information sheet. This document must provide a summary of the information necessary to understand the risks associated with investing on a scale of 1 to 7. 1 being the least risky and 7 the most risky.
The expected performance on the fund in different scenarios as well as the maximum possible loss. The financial appendix to the life insurance contract also includes information on the various funds to facilitate decision-making: performance history, comparison with a benchmark index or with the average performance of funds in its category.
If the fund’s performance must be scrutinized by the subscriber, he must also take into account its volatility or in other words the amplitude of its price variations. The more volatile a fund, the more risky it is. Diversification between different CUs is essential to control volatility. For example, it is more interesting to spread investment lines over several types of UC than to put all of your investment in a single asset class.
How to master the automatic management options of your contract?
A subscriber in free management, that is to say who chooses himself the funds in which he wants to invest, benefits from management tools integrated into his contract. In fact, advances in IT have enabled insurance companies to offer their clients tools intended to improve the monitoring of their savings and the management of their contract.
These tools are referred to generically as “automatic management options”. They are only found in multi-support contracts.
These options make it possible to gradually invest in the markets, to secure the gains acquired, to rebalance investments between different supports in order to remain consistent with their risk profile.
It is also possible to boost capital gains by investing them in more offensive supports. The advantage of these options for the subscriber is to be able to configure them so as not to have to intervene afterwards for each operation.
These options have a cost, however, and few contracts offer them for free. They are invoiced in the form of arbitration fees, which can either be deducted as a lump sum from the outstanding amount of the contract or be subject to pricing according to the number of transactions carried out.
The options also work exclusively of each other. For example, it is impossible to secure capital gains and boost them at the same time. You can only activate one at a time. It is, however, very easy to terminate it in order to initiate another that better corresponds to the subscriber’s objective.
To facilitate market entry and buy UC shares at the best price, contracts offer the option of progressive or fractional investment. For example, instead of investing 1000 euros in CUs all at once, the option will invest 100 euros per month for 10 months through automatic arbitrage. This makes it possible to smooth the purchase price of CUs and not to buy them too expensive when the market is bullish and to acquire more when the market is bearish. It is possible to change the amounts and their frequency at any time.
The option can also be stopped by the subscriber at any time. If the interest generated on the fund in euros is guaranteed to the subscriber, the same does not apply to those generated on the UC. To contradict this principle, the capital gains securing or clipping option makes it possible to regularly transfer the capital gains generated by the UCs to the euro fund of the contract according to a trigger threshold decided by the subscriber. The latter also chooses which UC media will be clipped as well as the periodicity (week, month, quarter).
The capital gains dynamization option works in the opposite direction: it is the gains generated on the fund in euros which are transferred to units of account chosen by the subscriber. Unlike progressive investment, the option only comes into play once a year, when interest is credited to the euro fund on December 31. It does not therefore make it possible to smooth the entry points on the markets.
Finally, automatic rebalancing makes it possible to return to the distribution initially planned by the subscriber regardless of market developments. For example, in the case of an allocation which provides for 60% on the euro fund and 40% on the UC, it is possible that in the event of a bull market, the proportion of UC becomes greater and rises to 50%. The option therefore makes it possible to reallocate accumulated savings over a fixed period in the proportions initially decided.
Is it possible to have several life insurances?
While it is only possible to hold a single Livret A, a single LDD or even a single Plan d’Epargne en Actions (PEA), life insurance does not know this limit. It is therefore possible to open several and, additional advantage, without payment limit, because life insurance is not capped.
Moreover, with more than 54 million open contracts, according to statistics from the French Insurance Federation, French households do not hesitate to open several contracts.
This can be an interesting strategy for several reasons. Insurance is a relevant response for the preparation of many projects: building up precautionary savings, additional income for retirement, passing on assets to one’s family or financing children’s studies. So many objectives with different horizons.
It may therefore be wise to open one contract per project in order to simplify management. This reasoning is also valid from the perspective of a transmission of assets with regard to several people. Rather than naming several in the same beneficiary clause, it may be more interesting to name only one beneficiary per contract. The process will make it possible to maintain a certain discretion with regard to the other beneficiaries and to maintain the peace of the families.
Finally, it is possible to optimize its financial management by assigning a type of management to each contract: for example a contract with a good fund in euros but little UA will be exclusively invested in the support with guaranteed capital and the subscriber will play diversification on another contract more complete in terms of CU.
Having multiple contracts is also beneficial from a tax standpoint. Contracts opened before November 1991 or even before 1983 present unbeatable inheritance advantages which no longer apply in modern contracts.
Likewise, having contracts open to different periods makes it possible to optimize the taxation of redemptions. In terms of inheritance, a contract opened after the subscriber turns 70 no longer benefits from the reduction of 152,500 euros as is the case for a contract taken out before this age.
After 70 years, payments made after this age only benefit from a reduction of 30,500 euros. But the interest generated by the sums paid is exempt from inheritance tax. It is therefore preferable for a subscriber over the age of 70 to open a new contract rather than making payments on an old one so as not to mix the applicable taxes.
Last point: opening several life insurances allows you to spread the risk in the event of bankruptcy of insurance companies. The People’s Insurance Guarantee Fund (FGAP) provides up to 70,000 euros per person, for all contracts held with the same insurer. Having several contracts with different insurers reduces the risk and takes advantage of the guarantee several times.
Can you open a life insurance policy for your minor children?
Like the bank book, a life insurance contract can be opened in the name of a minor child. It can be about capitalizing the sums paid on the occasion of birthdays or significant events (passing the bac, driver’s license) or the desire to empower a child or help him get started in life. The criteria for choosing a contract must be the same as for taking out life insurance for an adult (reduced costs, choice of media, good performance over time).
Opening a contract with a child also makes it possible to take advantage of the reductions in force on donations of sums of money. From this perspective, it is not only parents who can open contracts for their children, but also grandparents with regard to their grandchildren.
It is thus possible to make a donation with an assistant pact so that parents or grandparents can keep an eye on the use of funds as well as their management. For example, it is possible to block the withdrawal possibilities on the contract until the child comes of age.
How to tap into your life insurance contract?
Having savings that can be mobilized at any time is one of the qualities of life insurance. However, we must keep in mind the very specific tax mechanism that applies when the subscriber wants to draw on his contract on the occasion of a withdrawal, also called redemption in the jargon of insurers. A partial withdrawal makes it possible to meet a one-off cash flow requirement, while a total withdrawal consists of closing the contract and recovering all the sums that have been paid on it.
It should be kept in mind, that when the subscriber makes a withdrawal from his contract, the sum breaks down between a share of capital (which corresponds to what has been paid since the opening of the contract) and a share of interest which results from the accumulation of earnings linked to the sums invested. They can be generated by funds in euros or by units of account. In this diagram only the gains are taxed and not the capital. The tax base of a partial withdrawal is proportional to the sums withdrawn. For example if a subscriber has paid 20,000 euros on his contract and that five years later its value has appreciated to 30,000 euros. If the subscriber makes a withdrawal of 6,000 euros, the tax base will be 2,000 euros.
It is calculated as follows: cumulative payments on the contract x amount of partial surrender / current value of the contract. Ideally, it is better to dip into your life insurance after eight years of detention.
This does not mean that savings are blocked during this interval. It’s just that the taxation is more favorable beyond eight years. It is in fact possible to withdraw up to 4,600 euros in interest (9,200 for a married or civil partnership) every year tax free. For redemptions made before the eight-year deadline, the introduction of the One-Time Lump Sum (PFU) has changed the tax system usually applicable.
We must distinguish two situations: the contracts signed between September 25, 1997 and September 27, 2017 continue under the old system of the Lump Sum Payment (PFL) That is to say that during the first four years of holding the contract, any withdrawal is taxed at 35% (plus social security contributions at 17.2%. Between four and eight years this rate decreases to 15%. After eight years, after deduction of the deduction of 4,600 euros mentioned above , winnings are taxed at 7.5%.
On the other hand, for contracts opened after September 27, 2017 or for those opened before this date but which were the subject of a payment after September 27, 2017 are subject to the PFU of 30%, which corresponds to a rate of taxation of 12.8% plus 17.2% social security contributions.
The other element to take into account now is the total value of the contracts held by the subscriber. Indeed if the payments, all contracts combined, exceed 150,000 euros, the earnings will be subject to the PFU even after eight years of detention.
On the other hand, if the sum is less than 150,000 euros, it is the PFL of 7.5% which continues to apply beyond eight years. The reduction of 4,600 euros, however, continues to apply in both cases.
Finally, to determine the amount of the partial surrender allowing the best use of the allowance, the following formula must be applied: allowance x (contract value / (contract value-paid-up capital)).
Concretely, a single subscriber who has paid 20,000 euros on his contract which revalued after eight years to 50,000 euros can make a redemption of nearly 7,600 euros without paying tax.
From a fiscal point of view, since the allowance is renewed each year, it is worth spreading the partial withdrawals over the years to recover savings credited with interest but tax-exempt. Note that it is possible to set up scheduled withdrawals on an insurance contract.
What is the difference between redemptions and advance?
Redemption (or withdrawal) is the operation which allows the subscriber to draw on the savings accumulated on his life insurance contract. The partial surrender does not result in the termination of the contract, unlike the total surrender. A subscriber who has made partial surrenders is free to make new payments later on his contract.
The taxation linked to redemptions depends on the length of the contract. To tap into a contract without using the tax meter, it is possible to ask the insurer for an advance.
It is limited in amount to 80% of the savings invested in a fund in euros and 60% in units of account. The advance gives rise to the payment of interest, the amount of which varies from one contract to another. But it cannot be lower than the average rate for government bonds or, for contracts in euros, the remuneration posted the year preceding the advance plus management fees.
What is the taxation in the event of the subscriber’s death?
Life insurance is not only used to prepare additional income, it is also a tool of choice for preparing a transfer of assets under favorable tax conditions.
Being considered as a non-inheritance asset allows it to benefit from specific taxation.
It also has the advantage of allowing the subscriber to designate the beneficiaries of the capital of his contract freely. This beneficiary clause must be very precisely drafted to avoid family conflicts after the death of the subscriber.
In general, capital transferred with life insurance is tax exempt up to 152,500 euros. This allowance refers to the premiums paid and the interest they have generated.
The subscriber must also have made the payments on his contract before the age of 70. When the amount of the transmitted sum exceeds 152,500 euros, it is subject to a flat-rate deduction of 20% up to 700,000 euros and of 31.25% on the fraction which exceeds 852,500 euros.
The sums paid by the subscriber after his 70th birthday are subject to a specific additional allowance of 30,500 euros. It is calculated only on the amount of the payments and does not take into account the interest generated by these payments.
Last particularity which only affects very old contracts: those opened before November 20, 1991 and which have not been the subject of payments since October 13, 1998 are not subject to any taxation on the death of the subscriber.
What is a floor guarantee?
A life insurance contract contains different investment vehicles within the same envelope. While funds in euros present a capital guarantee, units of account (UA) support see their value fluctuate according to the vagaries of the market.
Generally speaking, French savers being rather reluctant to take risks with their money, they still massively favor funds in euros rather than units of account.
To reassure savers and encourage them to invest more frequently in UCs, insurers often offer a minimum guarantee in their offer. This is an option that protects the beneficiaries of the contract from stock market fluctuations. There are several types.
In its basic version, called the simple floor guarantee, it assures the subscriber that in the event of death, his beneficiaries will receive a minimum sum which corresponds to the payments made minus any withdrawals and advances made by the subscriber, even if the CUs in the contract show negative performance due to a fall in the markets.
Other, more sophisticated versions also exist. Certain minimum guarantees provide that the guaranteed capital will be revalued according to a benchmark index or that it will be increased according to events defined in the contract. From this perspective, the minimum guarantee is more like a form of death insurance.
The cost of such a guarantee depends on the amount of capital to be covered, but also on the age of the subscriber. Keep in mind that after 70 or 75 years, the floor warranty will no longer apply. It can therefore prove to be costly over time. Its usefulness must therefore be carefully evaluated by the subscriber.
How are social security contributions calculated?
While earnings from life insurance may be tax exempt in certain situations, it is on the other hand impossible to escape the payment of social security contributions. They are taken in different ways depending on the medium considered.
Thus on funds in euros, the withdrawal is made each year after allocation of interest at the end of December. It does not matter whether the contract is in euros or multi-support.
With regard to unit-linked support, the debit is made at the time of redemptions made by the subscriber. With some exceptions, the tax rate is that in effect on the date of acquisition of the interest. Since 1 st January 2019, the rate is 17.2%. By way of comparison it was only 0.5% in 1996.
Can you prepare for retirement with life insurance?
Preparing for retirement is a common concern of many French households. In this regard, they favor life insurance rather than dedicated investments such as PERP for example.
This is due to several advantages. First of all, life insurance makes it possible to build up savings in a flexible manner without the obligation to pay out at fixed dates. Then, the savings formed remain at the free disposal of the subscriber. He does not have to wait for retirement to draw on his capital and it can be mobilized very easily. Unlike PERP or Madelin, life insurance is not a “tunnel” savings product, the benefits of which can only be seen upon retirement.
Insurance also makes it possible to develop an almost tailor-made retirement preparation strategy. Depending on the deadline available to him, the subscriber may, for example, invest in equity funds and, as retirement age approaches, make arbitrations on the euro fund to secure his capital.
Another advantage of life insurance over retirement products: it is not compulsory to take out a life annuity. The subscriber can prefer a capital exit if he wishes. Ideally, it may be wise to combine the different mechanisms to benefit from a well-calibrated retirement.
Can we take out a life annuity?
The terms of exit from a life insurance contract are flexible. The subscriber has several options to recover his investments. The withdrawal by partial withdrawals can be used to supplement a retirement by regularly staggering the amounts that will be paid by the insurer.
In this case, even if the funds are never blocked, the applicable taxation is more lenient after eight years of holding the contract. Another possibility is the exit by full redemption. This involves recovering all of the sums placed on the contract in one go. The contract is closed and its inheritance benefits are then lost. Taxation is the same as in the case of partial redemptions.
Finally, it is possible for the subscriber to request the conversion of the funds on his contract into a life annuity.
In this case, the ownership of the savings is transferred to the insurer who in return undertakes to pay an annuity until the death of the subscriber. The amount of the annuity depends on the amount of capital accumulated on the contract but also on the age of the subscriber, which makes it possible to calculate his life expectancy by applying mortality tables calculated by the INSEE. Life annuities are subject to an annual revaluation which depends on the technical rate chosen by the subscriber.
This revaluation depends to a large extent on the financial results generated by the insurer. From a tax standpoint, the annuity is subject to income tax as well as social security contributions currently at 17.2%. However, it is only partially taxable, depending on the age of the subscriber at the time of the first payment of the pension. The older the age, the less taxable the pension.
Life insurance vs. death insurance: what are the differences?
The two are often confused because of the similarity in their operation. However, their respective objectives are very different. Life insurance responds to a need for savings while death insurance fulfills a provident objective.
For example, the borrower’s insurance taken out on the occasion of a mortgage is in practice a death insurance intended to cover the bank if the borrower were to die before having repaid his loan. An individual can also take out one individually in the form of a temporary death.
With this in mind, the subscriber seeks to cover his family if he were to die prematurely. In return for the payment of an annual premium which will change according to the age of the subscriber, the insurer undertakes to pay the designated beneficiaries a capital of an amount determined when the contract is taken out.
If the subscriber no longer pays the premium, the contract ceases and the insurer will pay nothing to the beneficiaries. This is why we often speak of a so-called “sunken” contract, which aims above all to guarantee a risk and not to prepare savings.
Another difference with life insurance, death insurance does not allow redemptions during the contract. The funds remain blocked until the risk materializes.
It should also be noted that death insurance contracts often provide additional guarantees intended to cover the risk of invalidity of the subscriber or to pay an education annuity to the subscriber’s children for a certain period of time.
Can you take out a life insurance policy after 70?
There are a lot of misconceptions about life insurance. The most common concerns the fact that the money is blocked during the first eight years or even that one is limited in the number of contracts that one can open.
Another misconception concerns the fact that one can no longer open a contract after the age of 70.
In practice, it is possible to open a contract at any age, even on behalf of a minor child.
If the age of 70 is often mentioned, it is because it corresponds to a change in tax rule in terms of transmission. Beneficiaries of a contract funded by subscriber’s payments before their 70th birthday receive tax-free capital of up to 152,500 euros in application of article 990-I of the General Tax Code. Premiums paid after the subscriber turns 70 fall under the application of article 757 B of the same Code.
With the exception of contracts opened before November 20, 1991, the sums paid are subject to inheritance tax after deduction of a specific allowance of 30,500 euros common to all beneficiaries. The latter therefore become subject to inheritance tax, not according to the capital received, but to the premiums paid by the subscriber. But only the bonuses are taken into account in the calculation of the rights, not the earnings they may have generated. With the lengthening of life expectancy, the amount of capitalized interest can represent significant sums.
In addition, in this case, the sums transmitted may benefit from the deductions applicable to inheritance tax.
In the context of a direct line transmission (from parent to child) the allowance is 100,000 euros. For a subscriber it may therefore be wise to open a contract after their 70th birthday. On the other hand, it is not recommended to remake payments after age 70 on contracts supplied by premiums paid before that age. The reason given is mainly due to the fact of not mixing the different applicable taxes within the same contract.
Can I transfer my life insurance contract?
Adopted on April 11, 2019, the Pacte law (Action Plan for the growth and transformation of businesses) aims to make retirement savings more attractive. It also makes some changes in life insurance.
It aims first of all to modernize euro-growth funds. It will also oblige insurers to communicate to savers on the average profit sharing rates attributed to their contracts.
More emblematic, the Pacte law confirms the possibility of transferring a life insurance contract. Unlike a securities account, a PEA or a retirement product like the PERP or the Madelin, life insurance was not transferable until now. That is to say, the possibility of closing an old contract to open a new one without losing tax precedence.
However, unlike the other products mentioned, the portability in life insurance will only be partial. That is to say, she will only be able to play within the same insurance company. A transfer of contract from one company to another therefore remains at this stage still impossible, although it is often requested by consumer associations.
Currently, a subscriber who is dissatisfied with his contract can only close it to open another. But the tax statement applies and it can happen that a contract that does not bring much money anymore turns out to be advantageous because it was opened during a favorable period. This explains why many savers prefer not to touch it.
The possibility of transforming an old contract into euros for a more modern multi-support with the same insurance company was introduced in 2005 by the Fourgous amendment. The Pacte law only extends this principle to multi-media contracts.
How to collect the capital on the death of the subscriber?
Life insurance is an envelope of choice to promote the transmission of capital to designated persons. However, the death of the subscriber does not automatically trigger the payment of the capital. Several years may elapse between the death of the subscriber and the payment to the beneficiaries. We are talking about dormant contracts. Several billion euros have still not found their legitimate owners and it is for this reason that the Eckert law of June 13, 2014 was promulgated.
It entered into force on 1 st January 2016. The insurer must now react upon learning of the death of the insured. To this end, he must consult at least once a year the National Directory of Identification of Natural Persons (RNIPP) updated by INSEE to inquire about the possible death of his policyholders. However, the beneficiary of a contract who is aware of the death of the subscriber can accelerate the procedure by sending the insurer a copy of the death certificate.
A person who does not know if he is the beneficiary of a contract can contact the Association for the Management of Information on Risk in Insurance (Agira). The Agira will then take care of contacting the insurers. When informed of the death of the subscriber, the insurer must contact the beneficiary or beneficiaries of the contract. He will ask for proof of identity or, depending on the relationship with the subscriber, a copy of the family record book or the Civil Solidarity Pact (PACS). He may also request a notoriety deed which is issued by the notary in charge of the succession.
In this regard, if the beneficiary clause has been deposited by will with a notary, it is the latter who is responsible for communicating the identity of the beneficiaries to the insurer. Upon receipt of the supporting documents, the insurer must pay the capital to the beneficiaries within one month. If this period is exceeded, the capital not transferred is remunerated at double the legal rate for three months and then three times beyond this period. It should also be remembered that the taxation of the sums transmitted differs according to the age of the insured at the time of the payments, before or after 70 years.
For sums paid before this age, the beneficiary signs a sworn statement to the insurer to indicate whether he has already benefited from part of the reduction of 152,500 euros. The insurer pays the sums after deduction of taxes. The same applies to sums deposited after 70 years, which are the subject of a summary document deposited with the Public Treasury. It is the certificate of acquittal issued by the organization which will allow the funds to be collected.
Should you name your spouse as beneficiary?
Life insurance allows great flexibility in the designation of beneficiaries by the subscriber.
By default, the standard clause designates in priority the spouse of the subscriber then his children. A designation that corresponds above all to the needs of young couples, who are just starting out in life and do not yet have children.
It should be borne in mind that transmitting capital to your spouse with life insurance does not bring anything on the tax front because under the law in favor of Labor, Employment and Purchasing Power (TEPA) , the spouse is exempt from paying inheritance tax. It does, however, make it possible to transmit more than what the law provides.
But there are also other means provided for by law such as for example the change of matrimonial regime. In the event that the couple has children from previous unions, it may be relevant to focus on life insurance and rethink the designation scheme.
From this perspective, taking out one contract per beneficiary can be more effective in preserving the peace of families rather than designating several beneficiaries within the same contract.
The use of a beneficiary clause dismemberment can also be studied. In general, it is preferable to seek the advice of legal professionals (notaries, lawyers) to find the way to pass on your assets at the best tax cost.
What is handicap savings?
To ensure the financial autonomy of a loved one with a disability preventing them from engaging in a professional activity under normal conditions, it is possible to take out a disability savings contract.
The contract works like a traditional life insurance with the only difference that it is not possible to withdraw from the contract in capital but only in life annuity.
It is the disabled person who is the beneficiary of the contract and only them. A survival annuity contract can be taken out with any insurance company. A contract already open can optionally be converted into a survival annuity contract. The applicable taxation is the same as in conventional life insurance. However, the premiums paid on the contract by the subscriber entitle him to an income tax reduction of 25% of the premiums paid during the year, up to a limit of 1,525 euros. The maximum reduction in income tax amounts to 381.25 euros. The pension paid to the disabled person can be combined with the Disabled Adult Allowance (AAH).
What is a Generation Life contract?
Created in 2013 with the objective of redirecting the savings of French households towards the productive economy, the Vie Génération contract is a specific variety of life insurance.
Its essential characteristic lies in its absence of guaranteed support. It only contains units of account. It is also referred to as a unit-linked unit-linked contract. The sums invested must be invested at least up to 33% in SMEs and midcaps, social and intermediate housing or even the social and solidarity economy.
This threshold must be respected from the first payment and during the life of the contract for each new transaction. The lack of funds in euros makes it more risky than traditional life insurance. In return, its taxation in the event of transmission is more advantageous. It has an additional reduction of 20% on the sums transmitted. Technically, these contracts are only interesting for people able to pay more than 152,500 euros to each beneficiary. This is also the reason why they are still quite a minority on the market.
What is Euro growth?
Created in 2014, the Euro-growth life insurance contract has the same objective as the Generation Life contract: to direct the savings of French households towards the productive economy and SMEs. On the other hand, the mechanics of Euro-growth are totally different from the Vie Génération contract.
Based on the attachment of the French to the euro fund, Euro-growth contracts also benefit from a guarantee on all amounts paid. But it only plays after a certain period of detention, generally after eight years. It may also have a later date. Euro-growth is supposed to allow managers to have more leeway to seek returns on the markets. The objective is to post a performance superior to that of traditional euro funds. The taxation of Euro-growth is identical to that of traditional life insurance.
Are Luxembourg life insurance contracts interesting to take out?
Still confidential, a few years ago, Luxembourg life insurance contracts are gaining notoriety among French savers. The debt crisis in the euro zone in 2011 but also the promulgation of the Sapin 2 law and its article 49 bis, which allows the State to temporarily freeze withdrawals from funds in euros in the event of default by the company. life insurance, have undoubtedly given interest to these contracts.
Technically, a Luxembourg life insurance contract is taken out with an insurer established in the Grand Duchy, or else with a Luxembourg subsidiary of a French establishment. Although governed by Luxembourg law, in terms of taxation, it is that of the country of residence of the subscriber that will apply. It is therefore not for tax reasons that this type of contract may interest a French subscriber.
In practice, the sums invested in a Luxembourg contract are not subject to the guarantee ceiling of 70,000 euros per insured, all contracts combined with the same company. The capital paid into a Luxembourg contract is deposited with a custodian bank, separate from the insurance company.
In the event of bankruptcy thereof, the savings deposited have a “super-privilege”. It is considered a first rank debt and takes precedence over the payment of salaries and contributions to social organizations.
But this security should be put into perspective because if there were violent market fluctuations, it is quite possible that Luxembourg will adopt measures similar to those existing in France. The interest of the Luxembourg contract lies above all in the wide variety of assets on which it is allowed to invest (listed shares, unlisted securities, live securities and alternative funds). At a given level of investment, it is even possible for the subscriber to have his own dedicated fund. Specificities that are of particular interest to the wealthiest savers.
Can we do private equity in life insurance?
With the aim of widening the possibilities of financial diversification accessible to subscribers and bringing French life insurance contracts closer to those of Luxembourg, the Macron law of 2015 makes it possible to integrate “private equity” into it. We also talk about private equity.
For a subscriber, this involves investing in unlisted SMEs while benefiting from the regulatory framework and taxation of life insurance. If this possibility is not new, it already existed within the framework of the life insurance contracts known as “DSK” at the beginning of the years 2000, it remained limited until now because of a great reluctance of the insurers to the with regard to securities considered illiquid and therefore risky in the context of the management of its portfolio of assets.
The Macron law allows insurers to give the securities rather than the money to the beneficiaries of the contract or to the subscriber if he makes a withdrawal. It is therefore no longer the company that bears the liquidity risk but the saver. The securities are most often FCPR units (risky mutual funds). This type of investment especially appeals to wealthy savers who are able to accept a dose of risk, because over a long period, it generally performs better compared to other asset classes. Because they are hardly correlated with those of the financial markets.
The Private Equity offering remains confidential, however. It is especially accessible in high-end contracts for wealthy customers. Indeed, the payment slip often oscillates between 15,000 and 100,000 euros. The portion allocated to private equity is also limited to 10% of the total outstanding amount of the contract in order to limit risks. However, given the enthusiasm of market players for this type of investment, an offer intended for the general public should develop over the next few years.
What guarantees are applicable in the event of bankruptcy of an insurance company?
Since 1999, under the law on savings and financial security, the Guarantee Fund for Personal Insurance (FGAP) has been established. This state-managed fund guarantees the amounts saved on life insurance contracts up to 70,000 euros per insured, all contracts combined with the same insurer.
This guarantee applies without distinction whether the sums are invested in the fund in euros or in units of account.
The adoption of the Sapin 2 law relating to transparency, the fight against corruption and the modernization of economic life also introduced the possibility of temporarily suspending the possibilities of redemption and payment on a life insurance contract during a period of 6 months maximum. The application of this measure must result from a serious and characterized threat to the financial system.