In this article I present this “tax envelope”, its advantages, why and how to use it. Everything you ever wanted to know about this banking product, life insurance.
What is life insurance?
🔍 It’s a contract that looks like a account that you open in a bank or other financial intermediary.
Indeed, your bank offers life insurance contracts but it is not the only one! There are hundreds of different contracts and with sometimes surprising actors: Carrefour, Axa, Alliance, MACIF…
⚠️ Not to be confused with death insurance which is an insurance that you pay a few euros per month and which in the event of death pays an amount to a designated beneficiary.
Vie Life insurance, despite its name, is not insurance. It’s an investment just like the ELP, the PEA, the Livret A, LDD…
Of course, you have to designate a beneficiary who in the event of death will be entitled to the money deposited into the account / contract but this is the only similarity to insurance. The money deposited in the account is yours and remains available.
Life insurance is therefore a financial investment. It’s a real ‘Swiss knife' savings because:
➡️ You can fully diversify your investments: guaranteed fund, real estate, OPCI, SCPI, stocks, bonds, ETF, FCPI, UCITS, SICAV….
➡️ It has a goal at any age of life: to ensure the future of children (permit, studies, etc.), enhance and diversify an estate, invest cash, prepare for retirement, pass on their estate, etc. It is therefore suitable for all profiles : students, active, retirees, investors…
➡️ You can have as many as you want (unlike other investments such as the PEL, Livret A, PEA…).
Define your investment horizon, your risk appetite (does it prevent you from sleeping to lose € 1,000? € 2,000? € 5,000?), and choose accordingly. Do not let yourself be influenced too much, but let the bankers and wealth management advisers present their products to you. You’ll always learn about life insurance.
Euro funds and units of account
You've heard of ‘euro funds’ and ‘units of account’ or UC. What gibberish for not much 😩!
🔍 The euro euro funds ’are guaranteed. This means that you cannot lose money. The rate is around 2% but is not contractual (not like a livret A, LDD, PEL) …
I was promised 2% on the background in euros of my UFF contract finally it is rather 1.2% after fees … It is mainly based on interest rates.
🔍 With ‘Units of account’ capital is not guaranteed because the value of each “unit of account” depends on what it is invested in.
This can be a real estate fund, SCPIs, government bonds, stocks, or more generally UCITS (Undertakings for Collective Investment in Securities).
It’s a financial product that depends on the economy somewhere in the world. This product can be risky (equities) or less risky (commercial real estate) but it is in any case not guaranteed. It's up to you the risk, often indicated between 1 and 7, and the yield. Note that you cannot lose everything, l‘The economy does not collapse like that overnight in all areas.
A real estate product can have a risk of 3/7 and a return of 4.5%! An equity product can have a 6/7 risk and can double your capital in 10 years. It can also generate no profit in 10 years. Capital losses over 10 years are statistically rare if you haven't paid too much.
The tax advantage of life insurance
Withdraw money after 8 years of detention
In addition to the advantages mentioned, life insurance is what is called a “tax envelope”. She allows to grow your money while benefiting from tax advantages when we recover it.
In practice, by withdrawing after 8 years, you are entitled to a reduction on earnings of € 4,600 (€ 9,200 for a couple with common taxation).
Example: Suppose a contract opened in 2010 with € 100,000. In 2019, this contract is worth € 120,000 thanks to the interest of these 9 years.
Capital gain = profit or gain = € 20,000.
If you want to withdraw all the money then you will pay a tax on € 15,400 (€ 20,000 – € 4600 abatement).
🔑 The key is to take advantage of these € 4,600 per year when you want to recover your capital. So, out of the € 120,000, you will withdraw € 24,000 every year during 5 years. You will get your € 120,000 back without paying tax on the € 20,000 profit. But it will have taken 5 years.
Indeed, only profits are taxed and therefore when you withdraw € 24,000 there is a profit of € 4,600 and € 19,400 of your starting capital. Do this 5 times and you will find your € 100,000 starting and your € 20,000 profit.
In terms of succession, it’s a gem: you can pass on 152,000 € without paying taxes. Provided that the payments were made before 70 years. Then the ceilings are different but it remains interesting.
Withdraw money before 8 years of detention
⚠️ Taxation differs if the contract is less than 4 years old, between 4 and 8 years old or more than 8 years old. It also differs for payments made before 09/2017 or after (Macron Law).
For withdrawals on a contract <8 years, you will therefore pay taxes according to the flat tax (on payments after 09/2017) or a rate of 35% + social security contributions (payments before 2017). In both configurations, you can opt for income tax (the profit will be added to your wages).
At Boursorama, you can simulate a partial buyout. Below, after 1 year of opening my contract. To withdraw € 600 net, my contract will decrease by € 617.
📌 In most cases, when I see around me the contracts of my loved ones, they have around 1,000 to 5,000 € and profits <100 €. The bank dissuades them from closing the contract and withdrawing the money on the pretext that the contract is not 8 years old.
So you will wait X years not to be taxed on € 100? No, do not hesitate to close contracts that are not performing!
Someone very close showed me his contract with € 40,000, 7 years of service, € 80 in profit. What time and what money wasted! And the counselor maintains that you must keep the contract to benefit from the tax benefits … what incompetence.
Delegate: managed or mandated management.
Pilotage management is what I recommend because you don't take care of anything, we manage your money for you. In general, managed management is accessible from a certain% of the contract in “units of account”. In other words, you have to put money in unsecured funds. You define together a “saver profile” to know the volatility that you accept on your money.
The manager's goal, as with you, is to make a profit. The manager will arbitrate your money on different media depending on the state of the world economy.
🔑 By making monthly payments, you smooth the risk by putting money on these funds at different times in economic cycles. If you invest as you go, you will pay money at high points in the economy (when everything is going well) but also at low points (when it is not going well). The upside potential is more interesting when the economy is obviously down ↗.
Free management: you are autonomous
This is the classic case proposed by most brokers. It's your contract, your envelope, and you put what you want in it. This requires time and a little knowledge. It is therefore very important to choose what you put in it, and make an annual update with your advisor.
You can very well open the contract, choose some media and leave the money on it. You have to know what you are doing. This is my case at Linxea Spirit. I was looking for a good contract to invest in SCPIs via life insurance.
The performance of life insurance
Any financial investment, and life insurance is one, aims to release performance that is to say a long-term higher value. With interest accruing, the account should have more money after 10 years than after 5 years normally. In any case, that’s the goal.
❌ Like any financial investment, money in this account has two enemies: taxes and fees.
Taxes are regulated, we have just seen. You can optimize by delaying withdrawals after 8 years and for the transmission of wealth.
For the expenses, be very vigilant! Between a contract which charges you 2 or 4% at entry then 4% per year and a contract which offers you € 200 at opening and costs at 2% the difference over 10 years is enormous.
My life insurance investments
Let's compare 4 life insurance contracts that I hold, let's take € 10,000 for each one for the sake of simplicity.
- Yomoni: 1.38% of fees in managed profile 5 management – 200 € offered – 0% on payments
- Boursorama: 2.77% of costs in managed balanced profile management – 150 € offered – 0% on payments.
- Linxea Spirit: 0.5% of fees on self-managed account units – 30 € offered – 0% on payments (open in 04/2020).
- UFF (Union Financière de France): 2% of fees on opening payments – 4% of fees on the real estate fund – 2% of management on other supports.
After 2 years, the UFF contract returned to € 10,000. it therefore took 2 years to reimburse the entry fees.
My Yomoni and Boursorama contracts performed + 6% over these two years.
⚠️ These contracts are exposed to the financial markets and therefore after 4 years (2016 -> 2020) and the famous coronavirus crisis, my Boursorama contract had a capital loss of 13% (more than € 8,500 out of the initial 10,000) and Yomoni had a capital loss of -9% (more than € 9,100 of the initial € 10,000). The UFF contract fell to -5%.
Why have multiple life insurance contracts
📌 remember 2 basic principles of investment: 1) Diversification 2) Long term.
Having multiple contracts allows you to diversify first, whether in terms of platforms and interlocutors (physical, online, broker, etc.) or in terms of content of contracts (real estate, stock market, etc.). So you can follow the evolutions of the different contracts over X years and target the best performers to reinvest.
📌 You can allocate a risk profile with each contract. We don't all want to take risks when it comes to our savings!
Depending on your risk aversion and your knowledge of the financial markets, you can choose a contract that allows:
➡️ A small amount on ‘purse’ media
➡️ A larger amount on media less exposed to the financial markets (bonds, real estate or guaranteed funds).
Conversely, if you want a greater gain in the long term, prefer stocks, via life insurance. Just find the supports or, in managed management, define a dynamic risk profile.
📌 This allows you to organize your future withdrawals.
Example: a contract for a 5-year project (you will see after 5 years whether it is better to wait 8 years to benefit from the tax advantage or not),
another for a 10-year-old project: birth of a child, a larger apartment, children's studies, etc.
a third for your retirement or a trip around the world at age 60
The contracts exposed to the financial markets can vary downwards, ask yourself : do I agree to have a € 500 capital loss in 5 years if it is to have a potential capital gain of € 1,000? € 2,000? Can I wait another 5 years to erase this capital loss?
Life insurance is an investment essential among all savers. Even if you take no risks with a euro fund, you have a better performance than the Livret A and the money is available.
It allows you to go to different media, including the stock market and real estate. It is particularly recommended to open several, preferably from different brokers. You can easily distribute your money according to your investment horizon.
If you don't know anything, choose the piloted management. I am very happy with Yomoni, but many others offer this service. You will learn a lot (if you are interested). If you're not interested, it's the same, the manager takes care of everything. Log in occasionally to watch the performance.
This financial tool is therefore suitable for all profiles and I highly recommend that you open one or more by inquiring first.
These articles could also interest you:
Cleaning your accounts in 5 steps.
Going on the stock market
Invest € 5,000 or Invest € 10,000 or more.