Life insurance taxation: what impact on my taxes?

”  A tax loophole  ” is the reputation that sticks to the skin of Life Insurance. Tax benefits, exemption from inheritance tax, this contract is not the preferred investment of the French for nothing! But what is it? What is its taxation and what are its real tax advantages? Why are we talking about tax carrots? We take stock of the tax aspect of this contract!

Why is the taxation of Life Insurance advantageous?

The principle of life insurance is to capitalize on the future. It is a savings and insurance contract signed between an insured and an insurer. Throughout this contract, the insured pays premiums on this investment which gives rise to interest. At the end of this contract, the insurer transfers to the insured a capital corresponding to the sums paid and the interest acquired.

The taxation of this investment is particularly advantageous because as long as you do not withdraw any money, the capital and the gains obtained are exempt from income tax.

It is only in the event of a withdrawal, commonly referred to as a ”  redemption  “, that you will have to declare it to taxes. This redemption will then only be taxable on the gains generated and not on the capital paid into your contract.

Life Insurance, therefore, enjoys privileged taxation. When redeeming your savings contract – whether partial or total – its taxation remains advantageous, but its rules are more complex. The taxation then differs according to several criteria: 

  • the age of the subscriber at the time of the payments, 
  • the amount of the sums paid, 
  • contraction age 
  • the choice of the insurance organization… 

What tax on life insurance?

Apart from redemption, the capital you deposit on your contract is not taxable. It is only in the event of a withdrawal that you will be liable for income tax, but only for the gains generated by this investment. To learn more, it’s here!

Are Life Insurances taxable?

Remember that as long as there is no withdrawal, there is no tax to declare. If you have a life insurance contract and you have not made a redemption, you do not have to declare the gains made, nor tax to pay. In a word, you are exonerated.

In the event of withdrawal – otherwise known as “surrender” – of your contract, you will be liable for income tax, but only on the gains generated by the interest on the capital paid. 

Do you have to declare your life insurance to taxes?

Here is the question that everyone is asking: “  Do I have to declare my Life Insurance to taxes? “. The answer is no! As long as you do not withdraw or redeem your contract, go your way. You have nothing to declare.

On the other hand, if you make a total or partial withdrawal and you have disposed of the gains generated on the paid-up capital, then you will be taxed on this profit. You will therefore be liable for income tax on this amount only.  

Thus, if you carry out the total, partial redemption, or the closing of your contract, you must declare this operation to the taxes. More precisely, it is the capital gain generated by your investment that must be declared to the tax authorities. You must therefore calculate the share that the taxable profit represents in the amount withdrawn.

In which box should I declare my Life Insurance?

On your n+1 income tax return, you will have to declare the profits from your investment, only if you made a withdrawal in year n.

However, it turns out that the tax return has recently been turned upside down. Since the tax reform brought about by the 2018 finance law, the number of boxes dedicated to Life Insurance has increased considerably. We have thus gone from six to ten squares: 2DH to 2ZZ, plus 2CG and 2BH. It then becomes difficult to find…

Don’t panic, we’ll explain! First, go to the “ Income from securities and securities” section on page 3 of Form 2042. Here, you will have the choice between two tax regimes depending on your situation: the fixed levy in discharge (PFL) or the income tax scale (IR).

So, which boxes correspond to which tax regime? If you have opted for the income tax (IR) scale, you will have to report the gains from your redemption in boxes 2YY, 2CG, and 2DF if your contract is less than 8 years old, and inboxes 2CH, 2CG, 2DF if you are over 8 years old. 

On the contrary, if you have opted for the fixed levy in full discharge (PLF), you will have to report the gains resulting from your redemption in boxes 2XX and 2CG if your contract is less than 8 years old, and inboxes 2DH and 2CG if he is over 8 years old. See, it’s not so rocket science!

Surrender of life insurance: can I be exempt from tax?

In certain cases of exceptional redemptions, the legislator provides that the insured may be entirely exempt from income tax, both on capital and capital gains. This is called a case of force majeure.

In concrete terms, these cases are limited to the following exceptional circumstances : 

  • 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;
  • The 2nd or 3rd category invalidity of one or the other.

In these very special cases, the taxation of this investment is simply nil. See how advantageous this tax system is!

What are the tax advantages of life insurance?

So, if we summarize, what are the tax advantages of this investment so appreciated by the French? In some cases, can the taxation of this contract be too high for this investment to turn out to be uninteresting, or even costly? We separate the true from the false…

What are the tax benefits of life insurance?

The first obvious tax advantage is that the money invested in Life Insurance is exempt from income tax, provided the insured does not withdraw amounts from this investment.

Then, when the insured makes a partial or total withdrawal of the money paid, he benefits from an attractive tax rate. The older your contract is (over 8 years old), the more advantageous the tax rate. 

If you have made payments from September 27, 2017, whether you opt for the flat-rate discharge (PFL) or the progressive scale of income tax (IR), the tax rate will be 30% of your contract in less than 8 years old. This rate will be higher if the last payments made on your contract are before September 27, 2017.

After the age of 8, your tax rate then becomes more favorable. Thus, it will be 30% for the PFL and 24.7% if you opt for the progressive scale, provided that the amount of your Life Insurance does not exceed 150,000 euros. Here is another interesting tax carrot …

Another tax advantage, after this stage of 8 years, you can benefit from an abatement. This tax allowance amounts to 4,600 euros for a single insured person and reaches 9,200 euros for married or PACS couples. 

Also, note that you can take advantage of a total exemption from income tax when you are faced with a redemption due to force majeure. In these exceptional circumstances, you recover the money from your Life Insurance without paying any tax…

Finally, the taxation of this contract in terms of inheritance is also particularly advantageous. Beneficiaries will benefit from significant tax reductions of 152,500 euros for payments made before your 70th birthday.

Can you lose money with life insurance?

So, is it true that with Life Insurance you have everything to gain? Is this why it remains the preferred placement of the French? Absolutely!

Nevertheless, it remains a long-term investment. Unless you use it for short-term savings, it does not involve any risk. Quite the contrary! The performance of your contract will be particularly remarkable after a holding period of 8 years. 

Finally, if you spread your investments cleverly over the different supports – euro funds and unit-linked funds – you will ensure a good return and will not risk losing money. 

What is the life insurance tax rate on inheritance?

Here is another tax advantage! This investment makes it possible to transmit to the beneficiaries of your Life Insurance large sums of money outside the estate. Concretely? In the event of the death of the insured, your beneficiaries will be exempt from all or part of inheritance tax. 

Thus, in the event of death, your spouse or PACS partner, the beneficiary of your life insurance, does not have to pay any inheritance tax. And this, regardless of the amounts of your contract and the sums received, regardless of the date of subscription of the contract.

The same also applies to your brothers and sisters, but only if they meet certain conditions on the day of death, namely: 

  • be single, widowed, divorced, or separated;
  • be over 50 or incapacitated for work;
  • have constantly lived with the deceased for the 5 years preceding the death.

The others will be subject to inheritance tax. However, this tax rate changes according to the date of subscription of the contract and the age of the insured on the day of the last payments.

To put it simply, regarding contributions paid after age 70, the beneficiaries of your Life Insurance will be exempt from inheritance tax if the amount of your contract is less than €30,500. Beyond this amount, contributions paid after age 70 are subject to inheritance tax, only for the part above €30,500.

For contributions paid before age 70, if the amount of your contract is less than €152,500, the beneficiaries of your contract are exempt from inheritance tax. Beyond that, a levy applies, regardless of their relationship to the deceased. This tax rate is 20% on the fraction of each beneficiary’s share that does not exceed €700,000. The rate of 31.25% applies for the fraction that exceeds this amount.

By Cary Grant

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