Life insurance is very often described as the preferred investment of the French, with its advantageous tax framework and the financial possibilities it offers.
It is indeed a long-term savings product that offers better returns than some more traditional products and can also serve many purposes.
But what is a life insurance contract, why take out one and how does it work? Let’s find out in this article
HOW DOES LIFE INSURANCE WORK?
As indicated in its name, it is a contract in the event of life: the insurer must return the capital at the end of the contract, together with interest, to the subscriber in the event of life, or to the beneficiaries at the time of death of the insured.
When the life insurance contract is opened, an amount is placed on a multi-support contract either on a fund in euros (capital guaranteed by the company) or in the form of units of the account placed on the stock exchange (and therefore subject to variations thereof).
Everyone can hold as many life insurance contracts as they wish for a given period.
The funds remain available but the capital gains resulting from the withdrawals are taxed on this occasion. Premiums or installments can be paid in one go, several times (on a one-off basis) or regularly (monthly for example).
At the end of the contract, the insured can withdraw all of his capital, take infractions, or even in the form of a life annuity (an annuity will be paid to the insured until his death, an ideal complement to improve his retirement ).
Regarding the beneficiary of the life insurance contract, it may be a person clearly named on the contract or direct heirs (family members). The life insurance contract, therefore, makes it possible to modify the distribution of assets when a specific beneficiary is named.
The various events in the life of the product are subject to charges levied by the insurer. These costs may relate to the opening of the contract, the costs during the payments, the acts of management, the arbitrations between the different funds.
In the event of the death of the insured and if there is a clearly named beneficiary, two situations should be distinguished:
- For premiums paid before the insured’s 70th birthday, the capital received by the beneficiary is exempt up to €152,500. Beyond that, they will be taxed at 20% up to €852,500 and 31.25% beyond.
- After the policyholder turns 70, only premiums exceeding €30,500 (for all contracts) are subject to inheritance tax. Interest is therefore exempt, which confers an additional advantage.
In the event that upon the death of the insured no specific heir has been determined, the capital from the life insurance contract is part of the estate and is therefore taxable under the usual conditions of the estate.
WHAT CAN LIFE INSURANCE DO FOR YOU IN RETIREMENT?
Life insurance is a contract that allows, above all, to carry out a more or less interesting financial investment according to the medium chosen (the remuneration of the investment is generally around 2% gross for risk-free investments, 5% gross for unit-linked investments). The starting amount can be minimal (around a few tens of euros) or much larger (several million euros). As seen above, the life insurance contract is financially advantageous and very comprehensive, but it can sometimes be very complex
But why choose a life insurance contract to build up capital or pass it on? For tax reasons, of course. But also to find flexibility in the organization of his success since the sums placed on a contract can be transmitted to the person of his choice (and not only his heir’s cf below).
The main advantage of investing in the form of a life insurance contract lies in the fact that only the capital gains realized are subject to income tax and social security contributions.
This contract allows you to pursue two objectives:
► The constitution of long-term savings through the payment of bonuses
► Transmission of capital: the death of the subscriber triggers the transmission of the capital to the beneficiaries.
Life insurance is a particularly attractive and relevant tool when it comes to building up long-term capital. It allows you to invest in a fund in euros (weak return-risk ratio) or in vehicles expressed in Units of Account (UA) which are more profitable but riskier. Thanks to the variety of vehicles available, subscribers can invest in accordance with their risk profile and investment horizon.
The repurchased products will also support in the cases the social contributions for those not having been paid with the wire of water.
Moreover, the sums invested are not blocked. A partial or total redemption (withdrawal) can be made at any time. In addition, a partial surrender does not lead to the closure of the contract.
WHAT WILL CHANGE IN 2022?
TMulti-support contracts must now contain a range of UC in ISR and Greentec (see definitions below)! That is to say, sustainable and responsible funds, promoting social financing and ecological transition. The insurer must now inform you when signing a contract of the percentage of labeled Units of Account (UA) contained in the contract.
Useful reminders and definitions:
UC = units of account (i.e. various and varied financial investment vehicles related to the stock market: ETFs – index funds – SCPIs – real estate assets -, SICAVs, SCPs, etc.)
SRI: Socially Responsible Investment is an investment in solidarity companies with social utility (micro credits, housing, and humanism.
TEEC: former name now called Greenfinch or green finance dedicated to financing the energy transition and under the control of the Ministry of Ecological Transition.
RETIREMENT AND HERITAGE PRESS REVIEW?
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LIFE INSURANCE, IS IN GREAT DEMAND AFTER RETIREMENT
If you’ve ever thought about subscribing to an investment product to supplement your retirement, you must have heard of or considered opting for life insurance. In fact, if properly laid out and managed, your contract allows you to access your capital as and when you need it during your retirement, a good way to earn additional income in retirement.
This investment is very popular with French retirees who want to organize their estate and protect their loved ones. After retirement, needs change and so do expenses. Expenditure on leisure, health, and well-being may take a larger share of your budget, while certain expenditure items may decrease or even disappear, such as the repayment of mortgages, the financing of education, children’s hobbies, and studies… It is therefore important to know your retirement budget in order to accurately define the savings needed to be put in place by then. You are far from retirement and would like to have an estimate of your pension? View our pension calculation benefits here.
The sums placed on your life insurance will automatically return to your beneficiary, if your clause is well-drafted, with much more advantageous taxation for them than in the context of a traditional succession.
TO GO FURTHER: THE DONATION / LIFE INSURANCE PACT
We have seen that the big advantage of life insurance allows you to transmit capital exempt from tax within the limit of €152,500 per beneficiary if the payments were made before your 70s (or 30,500 after your 70s, figures 2021) to the person of your choice, whether related or not: child, grandchild, niece, nephew, friend, foundation, third party, association, etc.
Optimization of life insurance: married grandparents can each take out a policy and thus pass on to each of their grandchildren €305,000 tax-free.
The life insurance contract pact is a trick to allow the beneficiary to receive life insurance before the death of the subscriber: to overcome this constraint and allow his grandchildren (or any other beneficiary of his choice) to benefit from these sums above all by respecting the deadlines for the duration of the 9-year life insurance contract, it is possible to sign a pact attached to the contract which sets the rules. This life insurance contract pact makes it possible, for example, to prohibit the beneficiary from receiving the money before a certain age, and according to different levels, on specific supports. This makes it possible to control the allocation and distribution of sums to heirs who are sometimes a little young and who could make mistakes.
The financial gain is not negligible, especially since all returns and capital gains generated by the investments of the contract are also tax-exempt.