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The Taxation of Life Insurance: Explanations

The essential:

The essential:

  • Life insurance is the last tax niche in France;
  • When you redeem, only capital gains are subject to taxation and you benefit from a low tax rate that decreases with the age of your policy and the value of your policy;
  • Your heirs will be taxed less than the rest of the property that makes up their estate.

Life insurance is a tax envelope in which you can invest in a very wide range of financial products. It is subject to a very advantageous taxation in case of life and during your succession. It should be noted that it is the date of the subscription of the life insurance contract which is to be taken into account for the taxation during your life and not the date of the payments. That is why it is necessary to take a date, that is to say open a life insurance contract in anticipation of a future investment and / or transmission to your heirs.

For more information on how life insurance works do not hesitate to read our article: life insurance: explanations

Taxation in case of life

With a life insurance policy, only your interest on a buyout (partial or total) is taxed. You can opt for either flat-rate taxation (PFU) or for income tax (IR) integration. However, regardless of the tax option chosen, social security contributions of 17.2% are applied.

Duration of your contract

Share of “net outstanding” *

less than € 150,000

Share of “net outstanding” *

over € 150,000

Under 8 years 12.8% or IR
More than 8 years ** 7.5% or IR 12.8% or IR
+ 17.2% social deduction

* “Net outstanding” = total premiums paid on all the policies of the insured – total redemptions made (share of capital). This amount is assessed as at 31/12 of the year preceding the redemption, regardless of the premium payment date.

** Abatement of 4,600 euros (for singles) and 9,200 euros (for married) on the share in interest. It applies primarily to taxable products at 7.5% and then taxable at 12.8%. If the progressive income tax rate is chosen for the year N, this express and irrevocable option is global: all the income of year N entering the field of the single flat-rate deduction (dividends , capital gains, …) are subject to the progressive schedule of income tax. This choice can be strategic depending on the tax bracket of your income.

Brief reminder on income tax (IR)

The taxable income (R) of your household is to be divided by the number of tax shares (N). You then get the family quotient. This is the amount subject to the marginal tax rate.

As a reminder, the first two children add 0.5 tax share each, the following children add 1 share each. Some situations give the right to an extra half-share (single parent, veteran, disability, …)

For information, here is the progressive schedule of the income tax 2017:

Family quotient

Marginal tax bracket (2017 rate)

Quick calculation

Up to € 9,807 0% 0
From 9,807 € to 27,086 € 14% (R x 0.14) – (1372.98 x N)
From € 27,086 to € 72,617 30% (R x 0.30) – (5,706.74 x N)
From € 72,617 to € 153,783 41% (R x 0.41) – (13,694.61 x N)
More than 153 783 € 45% (R x 0.45) – (19,845.93 x N)

Example : Suppose a married couple with a child where the taxable income of each spouse is € 50,000. The household has 2.5 tax shares:

  • the family quotient is: (50 000 + 50 000) / 2.5 = 40 000 € (30% installment)
  • the amount of the tax is:
    • detailed calculation: [(27,086 – 9,807) x 14% + (40,000 – 27,086) x 30%] x 2,5 = 15,733.15 €
    • quick calculation: (100,000 x 0,30) – (5,706.74 x 2,5) = 15,733.15 €

When to opt for integration with the income tax?

 When to opt for integration with the income tax?

It is advantageous to choose the option of integrating capital gains with income tax when the rate of your marginal tax bracket (including with the interest of your life insurance) is lower than the tax rate. flat-rate discharge. This may be the case when your income is low (for example during your retirement).

Social levies

Social security contributions of 17,2% are applied on your interests:

  • on the share in euro funds at the annual payment of your interests.
  • on the unit-linked portion of your redemption.

Social security contributions are deducted directly by the insurer, which transfers them to the State.

Taxation during a succession

When the subscriber dies, the life insurance policy is automatically settled. The capital is paid to the beneficiaries according to the wording of the beneficiary clause. Taxation is advantageous for the beneficiaries, whether they have a family link or not with the subscriber. The rules are different depending on the capital invested before or after 70 years.

Taxation on amounts invested before age 70:

 Taxation on amounts invested before age 70:

The amounts paid into a life insurance policy and the capital gains generated within it are said to be non-estate. This means that they will not enter the base of the estate, these sums will have a different tax treatment. The first advantage of life insurance is therefore to be able to lower the marginal tax rate of the estate.

Taxation on amounts invested after 70 years:

 Taxation on amounts invested after 70 years:

Although life insurance is less advantageous for payments made after age 70, there are two interesting benefits:

  • on the one hand, beneficiaries receive an additional allowance of € 30,500 (all beneficiaries combined);
  • on the other hand, interest generated in the life insurance policy is not subject to tax.

Take the example of a 75-year-old who would have paid € 200,000 in a life insurance policy, assuming that on his death the contract generated € 100,000 in capital gains and that a beneficiary was designated. Then the operation will be as follows:

  • an allowance of € 30,500 on the capital;
  • the integration of 169,500 euros (200,000 euros – 30,500 euros) into the estate with the application of inheritance tax;
  • a total absence of taxation on the 100,000 euros of interest generated.

Note that the reduction of 30 500 euros specific to life insurance is in addition to the possible reduction provided in the estate (for example 100 000 € in the case of a transmission parent child).

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