Life insurance remains the preferred investment of the French, in view of the overall outstanding amount held with banks, insurers or mutuals. Even if it would be reductive to mention only this justification, it is true that its favorable tax system remains its first advantage. However, the tax rules for life insurance are not straightforward, whether in terms of redemption or transmission. So let's come back together to the taxation of life insurance: has it changed with the Macron reform? What is the point of having a contract of more than 8 years? What will be the tax on the capital paid to beneficiaries? We tell you everything.
The taxation of open life insurance for 2020
The finance law for 2018 made some changes in tax matters life insurance. The Macron reform (and the famous flat tax on life insurance), which was feared by many holders of this type of contract, is ultimately rather profitable, except for “very large” contracts over 8 years.
What is changing? In the end, not much. The tax rules have evolved especially in terms of redemption (that is to say when you decide to withdraw all or part of the capital invested in life insurance) and in particular for payments made after September 2017.
This reform has an impact on some of the contracts already open at 1er january 2018 as well as all life insurance policies recently opened. However, the taxation of life insurance remains advantageous, whether in terms of the taxation of interest and capital gains, or in terms of the optimized transmission of capital on the death of the subscriber.
Life insurance enjoys privileged but relatively complex taxation. In fact, the rules differ according to the age of the subscriber at the time of the payments, according to their amount, according to the age of the contract, according to the choice of the organization … Take the time to compare the contracts before signing!
What is the taxation of life insurance excluding redemption and succession?
That your capital is placed on a guaranteed and secure medium (the fund in euros) or on riskier products (units of account), life insurance remains a savings product. It is really a “tax envelope”: whether it is a multi-carrier life insurance contract or a single-carrier life insurance contract, the taxation remains very favorable.
Concretely, the payments that you make on the contract generate interest and / or capital gains, depending on the medium chosen (euro funds and / or units of account). One of the main advantages of life insurance is that the gains are not taxed until you make a withdrawal. The taxation of life insurance for minor children follows the same rules.
As long as the earnings remain on your life insurance policy, they are not taxed. This is capitalized interest. It is only in the event of redemption (partial or total) that taxation occurs.
This data needs to be qualified. In reality, social security contributions will be taken:
- annually, on interest generated by the fund in euros;
- in the event of redemption only, on products resulting from your units of account (mutual funds, real estate investment companies, etc.).
The rate of social security contributions is currently set at 17.2%. In addition to this, you need to know more about it.
If your assets generate capital losses (i.e. the value of your contract is lower than the payments made) due to the volatility of the financial markets, you will not be taxed, either during the life of the contract or in case of redemption.
What is the tax base in the event of redemption in life insurance?
The term can be confusing. In life insurance, redemption means quite simply the withdrawal. You can make a surrender on your contract at any time, whether it is:
- a partial surrender: your contract continues but the capital is reduced;
- a full surrender: your contract ends and you lose its tax priority.
Your capital is never blocked! If you urgently need cash, you can request a withdrawal from your bank / insurer by sending a simple letter.
If you want to build up income in retirement, consider scheduled partial buybacks.
In terms of the taxation of the buyback, everything will depend on the age of your contract (less than 4 years old, between 4 and 8 years old, + 8 years old) and when the payments have been made. After 8 years, you will benefit from a reduction on the products generated by the capital and from a very advantageous tax system.
When you make a withdrawal, only the winnings will be taxed. The portion of your redemption corresponding to the capital will not enter the taxable base. Your organization will communicate to you, on request, the amount subject to taxation.
What is the taxation in the event of redemption on a life insurance contract?
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;
- on the basis of a lump sum discharge (PFL) which decreases over time. This is the reason why life insurance has become more and more attractive over the years.
Basic, your earnings will have to integrate your income tax base. The PFL is an option, which you will need to notify to the insurer upon withdrawal. It is discharging and will be taken directly by the establishment. Social security contributions are still added, currently at 17.20%.
Taxation of life insurance redemptions for payments before September 27, 2017:
Opting for the PFL is particularly wise if you are heavily taxed, that is, your tax bracket is high, especially if your contract is more than 8 years old.
If your life insurance contract is over 8 years old, you benefit from an annual allowance of € 4,600 on interest and capital gains (€ 9,200 for couples). This is one of the main advantages of life insurance: you will be able to withdraw a large sum with total exemption every year. This is an excellent solution for savers wishing to build up additional income, for example at retirement.
Taxation of payments made after September 27, 2017
The finance law for 2018 modified the rules on the taxation of life insurance redemptions for payments made from the end of September 2017. Exit the PFL, the alternative to integrating earnings into your income in the event of withdrawal is now the PFU, or single lump sum deduction.
Taxation of life insurance redemptions for payments after September 27, 2017:
* The PFU is a total of 30% (except after 8 years for payments of less than € 150,000), because it is made up not only of taxation at 12.8% but also of social security contributions established at 17.20%.
If your life insurance is more than 8 years old, you still benefit from the reduction of € 4,600 per year on your interest and capital gains (€ 9,200 for a couple). On the other hand, only the gains corresponding to the 150,000 “first” euros will be taxed at 7.5%. Those generated by payments over this amount will be taxed at 12.8% (in addition to social security contributions). This threshold of € 150,000 is raised to € 300,000 for co-enrolled life insurance.
The PFU is not final (free from tax). If you opt for this solution, the insurer will retain 12.8% upon redemption but you will have to include your earnings in your tax return. This will be subject to regularization thereafter.
The taxation of old life insurance contracts
Some “old” contracts, opened during the “golden age” of life insurance, are totally exempt in the event of surrender, even today. This is the case:
- life insurance policies opened before the 1ster January 1983;
- life insurance policies taken out after 1er January 1983 and for which payments were made before September 25, 1997.
What are the cases where the redemption is possible without tax?
The legislator has provided for cases of force majeure, in which the subscriber will be able to recover the capital + the interests and capital gains without undergoing 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;
- disability of 2 or 3th category of one or the other.
What is the tax for non-residents?
Expatriates are subject to special rules regarding the taxation of life insurance. In terms of redemption, payments made until September 27, 2017 are subject to the lump-sum deduction in discharge according to the age of the contract. Non-residents cannot opt for taxing their earnings on income tax. Ditto for payments after this date: only the one-time flat-rate direct debit is available.
They also do not benefit from the € 4,600 reduction after 8 years, but their life insurance is not taken from social security contributions.
What is the taxation in the event of the death of the insured?
Life insurance is an excellent tool for inheritance transmission, since it also enjoys very favorable taxation in this area. Concretely, via the beneficiary clause, you can designate one or more persons (natural or legal) who will receive a capital following your death. Most of the time, the capital will be treated outside inheritance and taxed under very favorable conditions, compared to the inheritance tax in force. The applicable taxation depends on:
- the age of the policyholder when the premiums were paid;
- of the premium payment date.
Taxation of 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 enjoys a tax deduction set at € 152,500 on the capital he receives following your disappearance. Concretely, only the part exceeding this amount (capital + interest) will be taxed, up to 20% from 152,501 € to 852,500 €, and 31.25% beyond.
Taxation of life insurance in the event of the death of the insured (premiums paid before age 70):
The existing allowance and the “low” tax rate make life insurance a great way to transfer capital to relatives. This is all the more true when it comes to people with a distant family tie, or worse, to third parties (because the latter would be heavily taxed as inheritance tax: 60%).
Since the TEPA law of 2007, the surviving spouse or the PACS partner is exempt from inheritance tax.
Taxation of premiums paid after 70 years
Again, the tax rules set out below relate to life insurance contracts for which premiums were paid after October 13, 1998. Under the terms of article 757 B of the CGI, the premiums paid by the insured for life insurance after his 70th birthday form an integral part of the inheritance, and do not benefit from an advantageous tax system, apart from a general allowance (all beneficiaries and life insurance contracts combined) of € 30,500. The winnings will be exempt. Only the capital (i.e. the payments made) will return to the estate on death.
Taxation of life insurance in the event of the death of the insured (premiums paid after 70 years):
The value of life insurance here is more limited than for premiums paid before the age of 70 of subscriber, even if the allowance still allows more than € 30,000 of exempt capital to be transferred.
The taxation of old life insurance contracts
Life insurance contracts opened before November 20, 1991, and for which the payments were made by the member before October 13, 1998, benefit from a total exemption in terms of transfer of capital.
Ditto for life insurance taken out after November 20, 1991, for which payments were made before the insured's 70th birthday and before October 12, 1998.
The annuity withdrawal from life insurance
Less often chosen, the withdrawal into a life annuity, which is an alternative to the partial redemptions programmed 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 when you file your income tax return. This will decrease according to age:
- if you are under 50, you will be taxed on 70% of your life annuity;
- if you are between 50 and 59 years old, on 50%;
- if you are between 60 and 69 years old, 40%;
- if you are over 70, over 30%.
In principle, withdrawal from a life annuity in life insurance is no longer possible after age 85.
Life insurance and real estate wealth tax
Since the reform of the wealth tax, now IFI (Tax on real estate wealth), life insurance is no longer included in 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 tool for tax exemption for 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 Real Estate) or OPCI (Collective Real Estate Investment Organization), you will have to integrate them into your IFI statement.
What is the life generation 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, that is to say in small or medium-sized enterprises (SMEs) or mid-sized enterprises (ETI) working in the field of housing social or social and solidarity economy.
In return, the subscriber benefits from a tax advantage additional on transmissions: in addition to the reduction of 152,500 € per beneficiary, he benefits from a specific and proportional reduction of 20% (applicable in 1er), which allows it to transmit a higher capital without taxation.
This type of generation life contract therefore only concerns “large” contracts, for which this second allowance will be useful from a perspective of estate optimization.
Frequently asked questions about life insurance:
As long as you do not make a withdrawal, your life insurance is not taxed. However, it is subject to a social levy of 17.2%. This will be deducted each year from the interest generated by your euro fund.
The taxation of life insurance in the event of the insured's death and inheritance is very favorable. It varies depending on:
– of the contract subscription date ;
– of the payment date ;
– of the'age of the subscriber during payments.
Depending on these criteria, the inherited capital may be totally exempt or be subject to taxation of up to 31.25%.
Yes, and this has several advantages! For example, you can keep old contracts that benefit from excellent taxation. You can also take out life insurance tailored to each of your projects, whether it is preparing for your retirement or anticipating a succession.
Choose the method of taxation that is most advantageous for you: either income tax or on the basis of a lump sum. You can also wait until your contract “ages”: after 8 years, you benefit from lower taxes and an annual allowance of € 4,600 on interest and capital gains (€ 9,200 for a couple).