It’s the favorite placement of the French, but how does it work? Life insurance is both a savings product, a provident product and a formidable tax niche. An essential product but often misunderstood by the French and a victim of misconceptions, we explain everything about how life insurance works. And if you are directly interested in choosing a good life insurance contract, then read our selection of the best life insurance policies.
Life insurance works like a real “Swiss Army Knife” for investing! The purpose of this article is to introduce you to life insurance from all angles. Discover how life insurance works, its composition, its specificities, its taxation and the multitude of possible investment strategies. Life insurance is a must have and very versatile product. In addition to classic euro funds, did you know that life insurance also allows you to invest in shares or real estate?
Presentation of life insurance
How to invest your money when you have already set aside precautionary savings and want to consider the longer-term investment more profitable? Your bank advisor – probably from the bank inherited from your parents or the one joined due to a mortgage – will certainly recommend that you invest in one of the most beautiful French tax loopholes: life insurance (AV). And he won't be wrong! Life insurance is an excellent product to earn a good return on your savings and pay 0 tax on the interest generated.
This is the best savings product, with the share savings plan (PEA), for those who want to receive tax-free financial income (excluding social security contributions at 17.2%). But unlike PEA, life insurance isn't just about stocks; there is something for everyone because one and the same life insurance contract can offer: guaranteed euro funds, stocks and real estate.
Your advisor is therefore right to refer you to life insurance if you have the capacity to save. But don't be in a rush: there are dozens of life insurance policies out there and your advisor is unlikely to market the best ones. So take the time to do a little market research. In the long run, choosing a good life insurance policy over a bad one could save you several thousand dollars. But how do you choose the right life insurance?
You already understand what life insurance is, to know how it works and to be able to compare.
Life insurance is called “multi-media” because it is an envelope that can contain several media
You can be invested in your life insurance in 2 types of support to choose from:
In euro funds
Euro funds are managed by the insurer and invested primarily in European government bonds (French debt for example). More dynamic euro funds are also somewhat invested in equities or real estate. In euro funds, your capital is guaranteed. With the ratchet effect, your wealth can only grow, year after year. Find the best euro funds here.
In units of account (UA)
These are equity, bond, monetary or real estate funds that will allow you to boost your savings. Units of account present a risk of capital loss: they are riskier but offer a better expectation of long-term gain. To go further, in this other article we explain everything about units of account.
Ludovic's Note : the most common units of account are not necessarily the most efficient. For example, trackers are rarely offered in unit-linked contracts, but are excellent products for investing in stocks.
Free allocation between euro funds and units of account, or managed management
You make your own allocation between media in free management mode (you can invest in 100% euro funds), or you delegate to a manager in managed management mode (there will be more or less units of account depending on your profile). Note that we can ” arbitrate “In his current contract: sell euro fund to buy CU, sell CU to go to the euro fund (to secure his earnings, for example) or switch from one CU to another. Life insurance is very flexible.
Note from Nicolas : That said, not all life insurance contracts are created equal: there are contracts that offer a wide range of units of account (of all kinds: equity funds, real estate, trackers, bonds, live securities, etc. ) and good euro funds. And very very poor contracts. So you have to choose your life insurance contracts well (we develop later).
With this scheme, it's already easier, isn't it? At this point you should already have a better understanding of how life insurance works, but let's move on and you’ll know it.
Life insurance is the preferred savings product of the French. However, this product remains unknown and many misconceptions circulate about life insurance. We will therefore have to get rid of it to properly assimilate the product and move forward. We restore here the truth about the 6 most common life insurance mistakes.
Money invested in life insurance is not blocked
Your money is always available, you are free to make partial or full redemptions (= cash withdrawals) whenever you want. The famous 8-year term only concerns more favorable taxation after this anniversary date. Having said that, you cannot transfer life insurance, then choose your life insurance carefully!
It is not a death insurance
Life insurance is above all a savings product. Unlike death insurance, which is not a provident product. That said, it offers important estate benefits for transmission to designated beneficiaries in the event of death: 152,500 € can be transmitted without inheritance costs per beneficiary! Thus, no tax to pay to transmit € 456,000 in the case of a person who has 3 children (or nephews, or other …). In fact, life insurance is deemed to be “non-inheritance”, which makes it possible in particular to transmit outside ordinary law (friend, child from another bed, etc.). Be aware that the beneficiary clause written by the client is strictly confidential.
Everyone can have more than one life insurance policy, to diversify the insurers / euro funds / account units accessible and take advantage of the deposit guarantee of € 70,000 per insurer per customer. And there is no payment limit.
Life insurance is not a product for the rich
Excellent contracts are accessible from € 100 at the opening and without obligation to pay later. Self-proclaimed “top-of-the-line” life insurance policies that require large entry tickets (which can exceed € 100,000) are not necessarily the best. Note that you can also take out life insurance for a child, from birth.
Life insurance is not an inherently risky product
The risk you expose yourself to depend on your choice of allocation. This is how you will allocate your payments between the different media of your life insurance contract. If you invest in 100% euro funds (possible even with multi-support life insurance), there will be no risk of capital loss. But if you opt for an aggressive management mandate, or if you allocate units of account yourself, you expose yourself to market volatility (equities, or bonds or real estate).
You have nothing to declare (really?)
You are only taxable when you make a redemption, on the part of the capital gain included in your redemption. And with a advantageous taxation, as you will see later in the article. So, as long as you don't take any money out of your life insurance, you don't have to report anything.
Understanding how life insurance works is also understanding the tax optimization of life insurance. Taking a date today on good life insurance will allow you to benefit from tax advantages sooner to use your savings. So even if you don't have a lot of wealth right now, don't wait to get life insurance.
You don't have to declare anything until you take money out of the life insurance policy. In fact, you are only taxable when you make a redemption on your life insurance, on the part of the capital gain included in your redemption. So your gains accumulate over time, without “tax friction”, which is why we speak of a capitalizing envelope. To learn all about the taxation of life insurance, it's here.
Life insurance taxation: income tax exemption after the 8 years of your life insurance
It's the age of the contract that counts, not the date of the money invested in it. It is therefore relevant to open as soon as possible, even if it means funding your life insurance only when it reaches its 4 years (or even better, 8 years). Indeed, making a repurchase on a contract of more than 8 years allows an exemption from taxes if one withdraws a sum which includes less than 4,600 € of “interest” (which represents much more in capital withdrawn) per year for a single person or € 9,200 for a married or civil partnership couple.
Advice from Nicolas : Take a date as soon as possible on a good life insurance without payment fees, because after the 8 years of your life insurance you will be able to withdraw regularly without paying taxes, by spreading your redemptions over time. At worst, before your 8 years, you will pay the flat tax of 30% on interest (social security contributions of 17.2% included) and you can opt for taxation on the income tax scale if you are not taxable.
Life and inheritance insurance: you also benefit from inheritance benefits!
You are free to choose your beneficiaries and you can transfer up to € 152,500 to them without their having to pay inheritance costs. Indeed, the sums paid (also called “premiums”) by the deceased before the age of 70 and from October 13, 1998 are subject to a flat-rate deduction of 20%, after application of an allowance of € 152,500. per beneficiary (all contracts combined). The fraction above € 700,000 (after deduction) is subject to a levy increased to 31.25%.
This provision is particularly interesting when the beneficiaries are not close relatives, taxed up to 60% outside of life insurance. Life insurance is deemed to be “non-inheritance”, this allows in particular to transmit out of common law (neighbor, friend, child from another bed, PACS partner, etc.) while benefiting from a significant reduction. Note that the beneficiary clause is also strictly confidential.
Amounts paid by the deceased after the age of 70 are part of the succession and are subject to inheritance tax, after an allowance of € 30,500. To note : for contracts opened before 11/20/1991 and if the premiums were paid by the deceased before October 13, 1998, the tax exemption is total. To go further, you can read our article Life and Estate Insurance.
How to obtain the capital paid in life insurance as a beneficiary?
Do you have a loved one who has passed away and you think you were the beneficiary of a life insurance policy they had saved on? Be aware that in France there are tens of billions of euros of dormant life insurance contracts, that is to say with the capital of the deceased not paid to the designated beneficiaries. And if no one claims this money, it is returned by the insurer to the state after 30 years! So to avoid this, think about enter the Agira online : This service will do the research to find out if you have life insurance taken out by the deceased.
How does life insurance work? We summarize here in 3 points:
It is necessary take date, that is, open as soon as possible. Indeed, opening life insurance now (even if it means paying only the minimum when opening) allows you to start the years counter and benefit from long-term tax advantages. Even a small sum (€ 100 on Linxea Avenir for example) can open a life insurance policy. It's the age of the contract that counts, not the date of the money invested in it. So don't wait any longer, plan ahead. To manage is to anticipate.
2 / Find a good life insurance broker
Life insurance is opened through a broker-distributor of contracts, which can be:
- a bank traditional. Examples: Cachemire 2 from La Banque Postale, LCL Vie, Life insurance plan from Crédit Mutuel CIC, Predissime 9 and Floriane 2 from Crédit Agricole. But these are “house” life insurance contracts heavily loaded with installment fees and management fees, with generally mediocre euro funds and units of account. In fact, traditional banks are still the largest distributors of life insurance contracts (thanks to their thousands of agencies with clients who do not have the reflex to compare), but they are losing ground to banks in line and online brokers;
- a online bank. Examples: Boursorama Vie, Fortuneo Vie, Hello Bank life insurance policies. Usually contracts with no installment fees and more reasonable management fees. As well as a better offer of euro funds and units of account;
- a Wealth Management Advisor. Unfortunately, he may tend to push towards the products with the most feedback, so the supply is very patchy;
- a mutual : MIF, AFER, AMPLI, MACIF (Multi Vie), MACSF and GMF (Multéo) offer honorable life insurance. Overall more interesting than with traditional banks, but less than with good online brokers.
- a online broker specializing in life insurance. Generally, they are multi-insurer brokers and they distribute the best contracts in our opinion. Like assurancevie.com, Placement-direct.fr, or even Linxea which distributes 4 different life insurances without payment fees (from insurers Generali, Crédit Mutuel, Crédit Agricole and Apicil). In addition, we can cite the FinTech Yomoni and Nalo for their excellent robo-advisor type management.
Thus, dozens of different life insurance contracts are distributed to savers through these 5 channels. In practice, the bank or the broker is only the intermediary: your money will be with the insurer. We invite you to read our ranking of the best life insurance policies on the following page. You will find that they are distributed among banks and online brokers.
3 / Two main families of products
Life insurance offers 2 main families of products in which you can invest within the contract (you can choose managed management, or allocate yourself in free management):
- the euro fund (s) of the insurer, with guaranteed capital. With the ratchet effect, your wealth can only grow, year after year. Find the best euro funds here.
- Units of Account (UA) which can be either UCITS (equity and / or bond funds), or trackers (basket of shares replicating an index, for example the CAC 40), or SCPI / SCI / OPCI (real estate “stone-paper” ), or structured products, or even more rarely live securities (direct shares / bonds).
The 4 steps to choosing and opening a life insurance policy.
1 / Decide how to manage your life insurance
Do you want to manage yourself or delegate to a manager?
In free management, you define your euro fund / unit-linked allocation yourself. This management method is recommended for insiders who want to choose the units of account, or to those who invest in 100% euro funds. Here is our selection of the best life insurance policies.
In managed management, depending on the profile offered by the broker (defensive, balanced, offensive, etc.), the manager has a mandate to manage for you. In practice, the manager of your life insurance defines the allocation of euro funds / units of account and depending on your profile there will be a greater or lesser proportion of units of account, therefore of volatility. Managed management (GP) is available among others for life insurance Boursorama Vie, Linxea Avenir, Linxea Spirit, Yomoni Vie and Nalo Patrimoine. The 2019 performance of our selection of the best managed management: from + 2% to + 32%.
2 / Choose life insurance
There are dozens of different life insurances, some very good and some very bad. So be very selective and compare before signing. Here are our selection criteria detailed here to make the right choice: we have selected the best life insurance policies and we recommend diversifying. Also see our life insurance comparison to make the right choice according to your profile and your objective: security, real estate, stock market, etc.
3 / Open your life insurance
In managed management, you validate the profile offered by the broker according to your temperament and your objective.
Free management, you choose your allocation between media (euro funds and units of account) yourself. Note that you can open certain life insurance policies with only € 300 and in 100% euro funds, this is the case with Linxea Vie. So if you do not want units of account or do not immediately know which units of account to choose, then opt for free management and allocate 100% in euro funds. Later, when your life insurance is opened, you can always arbitrate for free to invest in units of account.
4 / During the life of your life insurance
You can let your life insurance live: no obligation to pay on good life insurance and no tax declaration until you make a surrender. Note that you can manage everything online about the good life insurance policies that we recommend: payments, arbitrations between funds, setting up options, redemptions, etc.
Frequently asked Questions. The main thing to remember
Life insurance works like an envelope within which the saver can lodge different types of financial products : euro funds (secure capital) or units of account (equity and / or real estate investment funds in particular). You can open multiple life insurance contracts and withdraw your money whenever you want. Key feature: life insurance presents a very interesting tax framework.
First, you need to choose a good life insurance policy and you can simply open online. During the opening process, the broker will offer free management (free choice between funds) or managed management (the manager is responsible for choosing the funds suited to the investor's profile). An initial payment is required to open life insurance.
Strictly speaking, there is no return on life insurance. We are talking more about performance. And the performance of life insurance depends very largely on your investment choice within your free management contract, or on the performance of your managed management. Thus a euro fund will return on average 1.20% per year (it is possible to obtain nearly 2.50% with euro funds available from the best life insurances), while investment funds can yield more than 10% in return for a risk of loss.
The benefits of life insurance are manifold. First, the large choice of investments possible within the same life insurance contract: guaranteed euro funds, real estate, equities, etc. And then there is the very attractive tax system. Because life insurance benefits from deductions on taxable capital gains at the time of withdrawals. And reduction of 152,500 € per beneficiary to the succession.
Life insurance is a savings solution with no limit. Thus, you are not limited on the amount of capital paid. In addition, it is possible to have several life insurance contracts. It is even recommended to diversify euro funds, units of account and insurers (the client benefits from € 70,000 of state guarantee per insurer).
You are now much more familiar with life insurance and its many benefits for any type of investment. We therefore invite you to choose your life insurance : discover the selection criteria and our comparison of the best life insurance and euro funds and the best managed management.