Life insurance: What are the benefits of life insurance?

Life insurance, France’s favourite investment, continues to entice investors regardless of their demographics, amounts paid, or goals. It is true that life insurance has several benefits that extend beyond the tax framework. What are the advantages of having life insurance? What is its levy? What makes it such a good savings vehicle? We inform you of everything.

Life insurance is a tax envelope

Life insurance may be compared to an envelope in that the money put in it can be invested in a variety of media. Life insurance is classified into two types:

  • The mono-support contract: the full capital is positioned on a safe fund: the fund is denominated in euros. This secure investment earns money year after year, and there is no fear of loss since the insurer guarantees the value of your contract.
  • The multi-support contract: a portion of your money is put in the Euro fund, while the remainder is invested in riskier but higher-earning products: units of account. There are several channels available for accessing the financial and/or real estate markets.

The decision between the two, as well as the vehicles in which your funds will be invested, will be influenced by a variety of criteria, including your risk tolerance, profitability goals, age, market expertise, and so on.

Life insurance has a good rate of return

Despite years of dropping interest rates, the euro life insurance fund remains a more appealing investment than other safe products (such as Livret A, Livret de développement durable or PEL, and so on).

According to the French Insurance Federation, the average rate of return in 2020 was 1.10 percent.

However, not all euro funds are the same. Traditional banks and insurers are often failing to service more than 1.5 percent of their customers, with some institutions still exceeding 3 percent net of fees this year.

Life insurance is also appropriate for investors who are willing to incur risks in order to benefit. Some units of account carry a higher level of risk than others. For example, stone-paper funds (investing in “liquid” real estate) often provide high returns for a given degree of risk.

Life insurance is a flexible savings contract

Contrary to popular belief, savings are not restricted by life insurance. The capital (including capitalised interest) is always accessible. For example, if you want funds for a particular project, you may submit a redemption request:

  • Partial: You only get a portion of the contract’s value.
  • Total: you regain everything, but your contract loses its tax priority.

Life insurance also provides for progressive capitalization, which means that you may pay one-time or recurring payments at your leisure. If you want funds but do not want to touch the contract’s capital, you may obtain an advance from the insurer.

Several modes of settlement of the contract are also possible. It could be for example:

  • From a capital outflow,
  • A life annuity exit (your capital is then transformed into an annuity, according to its surrender value),
  • An exit in the event of death, that is to say the transmission of the capital (or an annuity) to the beneficiary(ies) you have designated.

The subscription is also available for two people: this is referred to as life insurance in co-membership. The primary benefit of joint subscription is that you may choose who will get the money in the case of death (settlement on the 1st or 2nd death).

Finally, if you want to increase the profitability of your contract by investing in units of account but are not an expert in the field, you will have numerous modes (and possibilities) for managing your life insurance (your assets ). The investing decisions will subsequently be made for you by a manager.

Life insurance enjoys preferential taxation on redemptions

In the case of redemption, life insurance provides significant tax advantages. To begin, keep in mind that when you make a withdrawal (partial or whole), it is composed of a capital component and an interest component. The tax base will consist only of interest; the portion of capital taken will never be taxed.

The appropriate taxes will be determined by the age of your contract as well as the date of payment of the premiums. After 8 years, the tax structure is optimal: in addition to a lower tax rate (as an alternative to income taxation), you will benefit from an annual allowance on the interest created by your contract (€4,600 per year for a single person and €9,200 for a pair).

Often, and particularly if your contract is more than 8 years old, the PFL or PFU (after deduction) will be more appealing than the restoration of interest in your income (especially given the tax is just 7.5 percent!).

Certain older contracts are even more advantageous: buyback will be allowed in entire tax exemption for a portion of the premiums paid prior to September 25, 1997.

Non-residents will be forced to pay the flat-rate fee and will not be eligible for the decrease after eight years.

Read more: Cancel travel insurance: Can you cancel your travel insurance once taken out? 

Life insurance makes it possible to transmit capital outside the estate

When you purchase life insurance, you are requested to name one or more beneficiaries, either natural or legal persons (s). You are free to name (nearly) whomever you want: Spouse, friend, nephew, organisation, young kid, disabled person….

In the event of death, the capital will be handed on to the person of choice under highly advantageous tax conditions: in reality, life insurance excludes inheritance for the portion of premiums paid before the age of 70. Each recipient will get an individual allowance on the funds received, and the tax rate will remain relatively low.

All insurance combined, the amount is €152,500 per named recipient (capital and interest included). Following that, there will be two tiers of taxes based on the amount communicated.

This enables you, for example, to favour a friend who would profit from an abatement and acceptable taxes over and above the abatement, when he would ordinarily have been taxed at 60% under the inheritance tax scale.

In the beneficiary clause, you might include a “reinvestment” obligation: the person will get the capital at your death, and it will be up to him to deal with it as you intended throughout your lifetime (maintain the house for example).

Capital transfer allowance for the portion of premiums paid after age 70

When the insured dies, a portion of the premiums paid after his 70th birthday will be reintegrated into his estate, after deduction. Unlike the percentage of payments paid before the age of 70, life insurance will not be considered individually.

Even though this seems to be a disadvantage in terms of estate optimization, an overall allowance of €30,500 (divided among all named beneficiaries) is nevertheless offered.

Contracts having a value less than this amount and premiums paid for more than 70 years will therefore be completely exempt when the capital is transferred to the recipient (ies). For contracts over €30,500, the excess will be charged as inheritance tax, according to the applicable scale (which is determined by the degree of kinship connecting the heir/beneficiary to the dead).

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