Update on life insurance taxation– Get a quote now

Withdrawals from life insurance benefit from very favorable taxation, especially if the contract is more than 8 years old. Depending on the subscription period, know how to limit the tax burden.

When you make a withdrawal (or redemption) on your life insurance policy, only the part of interest included in the amount withdrawn is possibly taxable (see: Quickly calculate your tax payable in 2017). The one that corresponds to the capital initially invested is not. However, there are subtleties and surprises in this tax system that are better known, to be sure you make the right decisions that will allow you to pay the least tax possible.

In video, the advice of our partner CCM Benchmark

1 – How are winnings taxed?

Gains are subject, at the option of the subscriber, to income tax, in the form of a flat-rate levy, or else added to his other taxable income and taxed according to his marginal tax bracket.

The flat-rate deduction is declining, depending on the duration run since the opening of the contract. It stands at 35% for a contract of less than 4 years, 15% for a contract from 4 to 8 years, and 7.5% for a contract of 8 years and more. However, a reduction is granted to contracts of more than 8 years: it is possible to withdraw up to € 4,600 in earnings each year (€ 9,200 for a couple) while benefiting from a tax exemption. Only earnings in excess of these amounts are subject to tax at the reduced rate of 7.5%. This is why life insurance is often used to build up regular income during retirement.

2 – How do you choose your tax between adding to income or flat-rate levy?

Your decision depends, first, on your marginal tax bracket. If it is higher than the rate of the standard levy, you will have to choose the latter, which will allow you to limit the weight of the tax. This is always the case for a contract of more than 8 years, unless you are non-taxable, since the first tax bracket starts at 14%, while the standard levy is at 7.5%.

But if your contract is more than 8 years old, and the amount of your taxable earnings is less than the reductions of € 4,600 or € 9,200, it is better to opt for the integration of these earnings in your income. Thus, you will not have to make the advance payment in advance (see question n ° 4).

Sometimes, and especially for contracts of less than 4 years, the rate of the flat-rate levy is however high (35%), and may be higher than that of your marginal tax bracket. In this case, it is better to opt for the taxation of earnings with all of your income.

To make an informed decision, you need to know the level of your marginal tax bracket. It depends on the size of the household income and the number of shares you have. Ask your insurer, before making a withdrawal, to calculate the share of taxable interest included in the withdrawal you are considering.

3 – How is the share of interest included in a buyout calculated?

The capital accumulated in your life insurance is of two kinds: your payments and the gains gained, as in all capitalization products. When you make a withdrawal, it includes a fraction of your payments, and a share of your winnings.

If you make a total buy-back, the calculation is simple: all sums beyond your payments are taxable gains.

➔ Example:you paid € 10,000 on your contract and your savings are € 15,000, the capital gain withdrawn is € 5,000.

During a partial withdrawal, it is a little more complicated. To determine the share of these potentially taxable gains, the administration and insurers use an official formula: taxable gain = withdrawal amount x ((cash value – premium paid) / cash value).

➔ Example:you paid € 10,000 on your contract and its value reaches € 20,000 (i.e. € 10,000 in earnings). You make a withdrawal of € 5,000. The calculation is as follows = 5,000 x ((20,000 – 10,000) / 20,000) = 2,500 €.

4 – When withdrawing from a contract of more than 8 years, the insurer does not deduct an allowance. How to benefit from it?

Contrary to what the concise definitions may suggest on the taxation of life insurance after 8 years (reduction of € 4,600 or € 9,200, then flat-rate deduction of 7.5%), gains are automatically taxed on their all, as soon as the insured opts for the fixed deduction.

However, these taxes are then deferred on your tax return and it is the tax administration which calculates the tax actually due, by applying the abatement. If you have withdrawn less than € 4,600 in interest during the year (or € 9,200 for a couple), you will be fully reimbursed for the taxes levied by the insurer, in the form of a tax credit. If your withdrawals exceed the level of the allowance, you will be reimbursed for the withdrawals paid to your insurer up to these allowances.

You will therefore have made a tax advance to the taxman for several months.

5 – When do you choose your tax method?

The option to add earnings to income or for the direct debit must be made when requesting redemption addressed to the insurer. This usually has a check box. If you do not choose, two situations are possible: either the insurer blocks the withdrawal until you have declared your preference, or it applies the default choice provided for in your contract. To find out what your contract provides for, read the general conditions again. And do not let the insurer choose for you, unless it has inquired specifically about your tax and social situation.

6 – Can we opt to add gains to income when buying back, then choose the flat-rate withdrawal?

Yes, because the option is exercised during each redemption request, without taking into account the options previously selected. You may, in particular, have an interest in adding the gains from your redemptions to your income during the first years of the contract, when the withholding tax rate is high, then opting for the flat-rate withdrawal when it reaches a lower level, or when the contract reaches its eighth anniversary.

7 – For the same buyout, can we combine a flat-rate deduction and income tax?

It is not possible to combine these two methods of taxation. But nothing prevents you from splitting your withdrawal into two operations, by opting to add to your income on the first redemption, then for the standard withdrawal on the second. ” It is an operation that can be adapted to people with low incomes who are close to the ceilings of certain social minima, explains Thomas Delannoy, director at Fapès Diffusion. Indeed, the option for the flat-rate deduction leads to adding all the gains withdrawn to the reference income, whereas with the option of income tax, the reduction comes to reduce the gains taken into account in this reference income. It may therefore be interesting to opt, first, for adding the gains to income up to the abatement, and then for the flat-rate deduction.

This technique is only valid for large redemptions. Taxpayers who are most resistant to tax will however also be able to use it to avoid making the lump sum advance.

8 – How to optimize the taxation when I make withdrawals?

In addition to choosing the most advantageous option (see question n ° 2), you can, when your contract is more than 8 years old, spread your withdrawals over several years. You will thus be able to benefit each year from the reduction of € 4,600 or € 9,200 on earnings, which allows you to withdraw a substantial share of earnings without tax: over ten years, a married couple can receive € 92,000 in interest – in addition to its initial capital – without paying a tax cent.

9 – When you opt for regular partial withdrawals from your life insurance, is it normal to see that the tax burden increases each year?

Yes, if the withdrawals are lower than the yield assigned to the contract. In this case, the capital value continues to increase in relation to the premiums paid, and the share of the earnings withdrawn therefore increases proportionally.

➔ Example:the capital of your life insurance contract amounts to € 100,000, including € 50,000 of interest. You withdraw € 10,000, i.e. € 5,000 of interest and € 5,000 of capital. The following year, your capital amounts to € 91,800 (€ 90,000 + 2% interest) and you withdraw € 10,000 again. The share of winnings in your withdrawal will then be € 5,098 (i.e.: € 10,000 x (91,800-45,000) / 91,800.

10 – Can we choose the media to be divested during a partial redemption and reduce our tax by separating those in capital loss?

The choice of media to be divested during a withdrawal depends on the possibilities provided by the contract. Most modern multi-media offer this possibility, but not necessarily older contracts, which may charge redemption across all compartments, in proportion to their respective place in asset allocation. ” That said, from a tax point of view, it doesn't matter whether the money comes from less or more capital: the insurer calculates the share of interest withdrawn based on the totality of the sums constituting your contract., says Thomas Delannoy. It is therefore a transaction without tax interest, except if one wishes to exit the medium in question, for financial reasons.

11 – Can an insured person turn against an insurer who has not informed him of the best tax option for his case?

The liability of insurers in tax matters is debated. The latter believe that there is no legal provision requiring them to inform the insured on these tax aspects, as the insurance mediator recalled in his 2012 report. The judges have already ruled in their favor on several occasions (notably , cass. civ. 1st, from 12.12.95, n ° 93-20.268 and cass. civ. 2nd, from 5.7.06, n ° 05-13.580), considering that the obligation to advise insurers relates to the insurance transaction itself. Some judgments are however more divided, like that of the Court of Appeal of Versailles (3rd ch., 12.1.07, n ° 05/08908) who felt that the insurer should draw the attention of policyholders to the tax consequences of certain options (in this case, inheritance tax).

In short, nothing prevents you from bringing an amicable recourse against your insurer to assert your damage. But if he refuses to hear you, the path of justice seems very random.

12 – My contract, opened before 1997, includes a share of non-taxed earnings. How to know the amount of taxable earnings in the event of partial withdrawal?

For these old contracts, which contain several tax compartments, it will be very difficult for you to calculate yourself the share of non-taxable gains that you can withdraw. Your withdrawals will in fact be charged to the two compartments of your contract, in proportion to their respective value, and only the insurer knows precisely their importance. Before making a withdrawal, ask your insurer for simulations to measure the level at which you risk being taxed.

13 – Is it interesting to make a buy-back and then reinvest in order to erase the gains of a life insurance policy of more than 8 years?

Theoretically yes, since you will be able, each year, to transform part of your earnings into invested capital, therefore non-taxable. However, this is only interesting for a contract of more than 8 years, and on condition of calibrating your withdrawals so that the taxable part does not exceed the limits of the abatement.

➔ Example: married, you have a contract of € 100,000, which includes € 30,000 in earnings. If you withdraw € 30,000 during a partial withdrawal, the capital gain withdrawn will amount to € 9,000 and will not be taxable. It will definitively exit from your contract, the capital gain of which will amount to € 21,000. You can therefore reinvest these € 30,000 in your life insurance and repeat the same operation the following year. After 3 to 4 years, you will have settled the major part of your capital gains and will be able to withdraw the balance of your capital without tax, or very little. And to avoid having to advance the tax levy of 7.5% for almost a year, opt to add these gains to your other income (see question n ° 4). For the operation to be economically viable, however, you must have a contract that does not charge any fees on payment. Otherwise, the fees paid to the insurer may represent amounts greater than the taxes saved …

14 – What operations do insurance companies declare to the tax authorities?

Companies are obliged to declare each year to the tax authorities all the withdrawals recorded on each of the contracts they manage. They must specify the amounts paid to each beneficiary (in the event of life or death), as well as their precise identity. The taxman therefore has perfect knowledge of this information, which allows him to calculate the abatements in particular.

Eric Leroux

Gains exempt in certain situations

No matter how long your contract is, there are several life-threatening situations where you can withdraw your savings without incurring income tax. These are dismissal, early retirement, severe disability (2nd or 3rd category) and termination of self-employment following a judgment of liquidation. The exemption is acquired when one of these events strikes the insured or his spouse (partners of PACS and cohabiting partners are not taken into account). In such a case, you should not opt ​​for the flat-rate levy, but for the addition to all other income. You will have to provide the insurer with the necessary supporting documents to benefit from this exemption. In all cases, you remain liable for social security contributions of 15.5%.

Social security contributions, a very complex mechanism

Social security contributions (currently at 15.5%) are due on all earnings, without taking into account allowances. They are deducted according to two different methods depending on whether the gains concern the euro fund or the “unit-linked” compartments. Funds in euros: direct debits are deducted each year at source, when the insurer credits the interest on the account. Support in unit-linked accounts: payment of social contributions is made upon withdrawal or death only. As long as the sums grow on the account, they are not subject to it. When exiting, the rate in effect at that time is applied, regardless of the period in which the gains were recorded.In a multi-support contract, which combines euros funds and units of account, these two methods are implemented. The insured therefore pays withdrawals each year from his fund in euros, then during a redemption, the insurer calculates the social contributions due on the gains of the units of account redeemed. It then deducts the withdrawals already paid from the fund in euros. If the insured has paid too much in advance (when the unit-linked supports are in loss), he is reimbursed the overpayment. Recall that the CSG paid on a multi-support is tax deductible up to 5.1%.