A Life Insurance & Inheritance policy provides protection and financial benefits to one or more individuals in case of the policyholder’s death by ensuring a payout, while also allowing the policyholder to plan for retirement.
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| Understanding Life Insurance & Inheritance: Protecting Your Legacy |
The tax treatment of payouts varies with different policies and can sometimes be exempt from inheritance taxes.
What is Life Insurance?
Life insurance is a contract where an insurer or bank commits, in exchange for one or multiple premium payments, to pay a specified amount to a designated individual upon the policyholder’s death.
Why Purchase Life Insurance?
- To transfer a sum of money to a designated beneficiary (or beneficiaries) under favorable tax conditions.
- To enhance retirement quality of life. Life insurance is a popular investment due to its flexibility in the savings phase and payout options suited to the policyholder’s profile (withdrawals can be taken as a lump sum or annuity).
- To diversify financial investments. Savings are invested in euro funds and/or unit-linked funds. Unit-linked life insurance policies invest savings across various assets but carry some risk for the insured. On the other hand, euro fund life insurance guarantees the capital.
Life Insurance and Income Tax
Throughout the contract's term, gains are temporarily exempt from income tax, becoming taxable only when the policyholder makes a partial or full withdrawal.
The 2018 Finance Act introduced a Fixed Tax (PFU) or "Flat Tax" applied to all financial investment income, including life insurance, unless opting for a progressive income tax rate.
Note: This tax reform applies to withdrawals made from January 1, 2018, onward and interests on deposits made after September 27, 2017.
Withdrawals and Taxation
Non-Liberating Flat Withholding Tax (PFNL): Upon payout, policy gains are subject to PFNL at 7.5% if the policy is over eight years old and 12.8% if under eight years. These gains must be reported on the following year’s tax return and may be taxed under PFU or a progressive scale. If PFNL exceeds the owed tax, the surplus is refunded.
Note: Individuals with a reference fiscal income under €25,000 for a single person or €50,000 for joint filing may request a waiver of this withholding tax.
Final Taxation: The PFU applies at a rate of 12.8% or 7.5% for policies over eight years old, though the taxpayer can choose progressive income tax if it applies to all income in that category.
If the policy is less than eight years old, PFU stands at 30% (12.8% flat tax plus 17.2% social contributions). For policies over eight years, an annual allowance applies (€4,600 for singles, €9,200 for married or PACS couples).
For deposits up to €150,000, PFU is 24.7% (7.5% flat tax and 17.2% social contributions). For amounts above €150,000, the portion exceeding this is subject to a 30% PFU (12.8% flat tax and 17.2% social contributions).
Some situations allow for tax-free withdrawals, such as unemployment, early retirement, disability, or judicial liquidation. These apply to both the policyholder and their spouse.
Designating a Life Insurance Beneficiary
The policyholder can freely designate one or more beneficiaries, either at contract signing or later. This designation is typically recorded on the insurance contract or another document, such as a will.
The advantage of designating a beneficiary in a will is confidentiality, as the policyholder retains total freedom, especially in changing beneficiaries. If this route is chosen, it's advisable to indicate in the contract that the beneficiary will be designated in the will, possibly including the notary's contact details if relevant.
Note: Writing the beneficiary clause carefully is crucial to avoid potential disputes over the designation and because if no beneficiary is specified, the contract’s value becomes part of the inheritance assets, losing tax benefits.
Death of a Life Insurance Beneficiary
As one of the French’s preferred investments, life insurance allows policyholders to accumulate funds to pass on to beneficiaries upon death.
But what happens if the designated beneficiary dies?
If the beneficiary dies before the policyholder, life insurance capital will go to the designated secondary beneficiary or, if none, be included in the policyholder's estate and distributed among heirs.
If the beneficiary dies after the insured but before receiving the payout, two scenarios apply:
- If the beneficiary had accepted the contract, the capital goes into their estate and is subject to inheritance taxes.
- If the beneficiary had not accepted the contract, and no other beneficiary is named, the funds are transferred to their heirs, with taxes applicable as per life insurance rules.
Are Life Insurance Contracts Subject to Inheritance Tax?
In some cases, life insurance contracts may be subject to inheritance tax, though some beneficiaries are exempt.
Exempt Beneficiaries
At the policyholder’s death, the payout to the beneficiary does not legally count as part of the estate (exceptions exist, such as for married couples under joint property). Tax exemptions apply to policies designated for a spouse, PACS partner, certain non-profit organizations, and, under specific conditions, siblings.
In other cases, a portion of the capital may be taxable depending on:
- the policy’s subscription or payment date,
- the policyholder's age at payment,
- the capital amount paid to beneficiaries.
- Life Insurance and Community Property
Two scenarios must be distinguished:
- If the beneficiary spouse dies, the surrender value of the policy, if funded with shared assets, counts as part of the shared estate, with half included in the deceased spouse's estate.
- If the policyholder spouse dies, the policy benefits belong solely to the surviving spouse. If the beneficiary is not the surviving spouse, compensation is owed to the shared estate for half of the surrender value.
Consulting a notary is recommended to determine the best contract for your personal situation. If you already have a policy and wish to change the beneficiary clause, they can assist with drafting.
If you are a life insurance beneficiary, they can also help clarify the tax implications.
Life Insurance Explained in 3 Minutes
- What does life insurance entail?
- Who can be life insurance beneficiaries and why?
- What's the difference between life and death insurance?
- Can a notary help locate a life insurance beneficiary, and if so, how?