What is the taxation when buying life insurance?
The term can be confusing. In life insurance, surrender simply means withdrawal. You can purchase your contract at any time, whether it is:
- a partial redemption: your life insurance continues but the capital is reduced;
- a total surrender: your life insurance ends and you lose its tax precedence.
Your capital is never blocked! If you have an urgent need for cash, you can request a withdrawal from your bank/insurer by sending a simple letter.
If you want to build up retirement income, consider scheduled partial redemptions.
In terms of the taxation of the redemption of life insurance, everything will depend on the age of your contract (less than 4 years, between 4 and 8 years, + 8 years) and the time at which the payments will have been made. After 8 years, you will benefit from a deduction on the products generated by the capital and from very advantageous taxation.
When you make a withdrawal, only the winnings will be taxed. The part of your redemption corresponding to the capital will not enter the tax base. Your organization will inform you, on request, of the amount subject to taxation.
Taxation of payments made before September 27, 2017
Payments made before September 27, 2017, are subject to the old taxation of life insurance redemptions. Interest and capital gains resulting from your payments will be taxed in the event of redemption, as you wish:
- income tax (IR): you will then have to include them in your tax return;
- based on a fixed levy in full discharge (PFL) which is decreasing over time. This is the reason why life insurance is more and more interesting as the years go by.
Your earnings will have to integrate your income tax base. The PFL is an option, which you will have to notify the insurer upon withdrawal. It is liberating and will be taken directly by the establishment. To this are always added social security contributions, currently at 17.20%.
Life insurance, when is it possible to avoid any taxation?
The legislator has provided for cases of force majeure, in which the subscriber can recover the capital + interest and capital gains without suffering any taxation. It’s about:
- the dismissal of the insured and/or his spouse;
- the judicial liquidation of the company of the insured and/or his spouse;
- the early retirement of one or the other;
- 2nd or 3rd category invalidity of one or the other.
Some “old” contracts, opened during the “golden age” of life insurance, are completely exempt in the event of redemption, even today. This is the case as follows:
- life insurance policies opened before January 1, 1983;
- life insurance is taken out after January 1, 1983, and for which payments were made before September 25, 1997.
What is the taxation of life insurance in the event of inheritance?
Life insurance is an excellent tool for inheritance since it also benefits from very advantageous taxation. Concretely, via the beneficiary clause, you can designate one or more persons (natural or legal) who will receive capital following your death. Most of the time, the capital will be treated outside the estate and taxed under very favorable conditions, compared to the inheritance rights in force. The applicable tax depends on:
- the policyholder’s age when the premiums were paid;
- of the premium payment date.
Taxation of life insurance premiums paid before age 70
If your contract is relatively recent, or in any case, if you paid your premiums after October 13, 1998, the following rules apply to you. Under article 990 I of the General Tax Code (CGI), each beneficiary designated by you benefits from a tax allowance set at €152,500 on the capital he receives following your disappearance. In concrete terms, only the part exceeding this amount (capital + interest) will be taxed, up to 20% from €152,501 to €852,500, and 31.25% beyond that.
What is the taxation of life insurance opened in 2000 if its beneficiaries are nephews?
You opened life insurance before 2017 and your beneficiaries are part of your family? In this case, if you die and are subject to a more detailed study of your contracts, each of your nephews (nieces) would benefit, for premiums paid before age 70, from an exemption of up to 152,500 euros, then would suffer taxation of between 20 or 31.25%.
Thus, life insurance is an excellent tool for rewarding relatives who are not directly your descendants, while maintaining the availability and enjoyment of your money until the end. As part of a classic transmission, nephews and nieces must pay 55% inheritance tax on their inheritance, beyond a deduction of 7,967 euros.
What is the taxation of life insurance for non-residents?
Expatriates are subject to special rules regarding the taxation of life insurance. In terms of buy-back, payments made until September 27, 2017, are subject to the flat-rate withholding tax depending on the age of the contract. Non-residents cannot opt to have their earnings taxed on income tax. Ditto for payments after this date: only the single flat-rate direct debit is available.
They also do not benefit from the abatement of €4,600 after 8 years, but their life insurance is not punctured by social security contributions.
What tax on life insurance?
Since the reform of wealth tax, which became IFI (tax on real estate wealth), life insurance no longer falls within the tax base, at least:
- for sums invested in the fund in euros;
- for sums invested in non-real estate products.
The Macron reform is, therefore, on this point, a tremendous development for life insurance holders subject to ISF in the past. This type of contract, therefore, becomes, in addition to its other advantages, a tax exemption tool for a wealth tax.
Note that if part of the capital of your life insurance is invested in real estate securities such as SCPI (Société Civile de Placement Immobilier), SCI (Société Civile Immobilier), or OPCI (Organism for Collective Investment in Real Estate), you will have to include them in your IFI statement.
Life insurance, what is an annuity?
Less often chosen, the exit in life annuity, which is an alternative to the partial redemptions scheduled during retirement, remains possible. This option is subject to separate taxation, very different from that affecting capital redemptions. Here, it will not be the interest that will be taxed, but the annuity in its entirety, depending on your age when you receive it for the first time. You will have to declare a fraction of it on your income tax return. This will be degressive according to age:
- if you are under 50, you will be taxed on 70% of your lifetime pension;
- if you are between 50 and 59 years old, on 50%;
- if you are between 60 and 69 years old, on 40%;
- if you are over 70, 30%.
Exiting a life annuity in life insurance is in principle no longer possible after the age of 85.
What deductions apply to life insurance?
As a reminder, we speak of abatement to designate a deduction granted allowing to deduct its tax base, and therefore its taxation. Life insurance is a savings product that offers the possibility of lump-sum reductions. What are they?
It is necessary to distinguish two periods concerned by a possibility of reduction in a life insurance contract:
- during the life of his contract, at the time of total or partial surrender of his life insurance;
- at the end of the contract, at the time of the transmission of the capital present in the life insurance in a context of succession.
What is the generation life contract?
A generation life contract is specific life insurance. At least 33% of the capital must be invested in the French and/or European economy, ie in small or medium-sized enterprises (SMEs) or medium-sized enterprises (ETI) working in the field of social housing or social and solidarity economy.
In return, the subscriber benefits from an additional tax advantage on transmissions: in addition to the allowance of €152,500 per beneficiary, he benefits from a specific and proportional allowance of 20% (applicable in 1 st ), which allows him to transmit a higher capital without taxation.