Taxation of life insurance: beware of ease!

Life insurance contracts are at the center of long-term asset strategies because they are both investment, tax optimization and transmission tools. But reversals of legislation could indeed undermine these arrangements. The lighting of Sophie Nouy, ​​director of the heritage expertise center at Cyrus Conseil.

Life insurance is regularly the subject of fundamental reforms which make its use complicated for individuals and professionals alike.

Life insurance, an unstable regulatory framework

The tax regime that applies to the latter in the event of death is dependent on the taxation in force at the time of the death of the person concerned, in addition to the date of subscription to the contract, the date of the payments and the age of the insured at the time of the payments. The taxation of withdrawals varies just as much according to the reforms, overriding the already numerous, dense and specific rules. There is therefore a political risk of changing the rules. However, the effects of this instability are mitigated on redemptions by the very operation of life insurance: in the event of a partial redemption, only the share of interest from the redemption is considered as taxable income. The tax base is therefore smaller than the cash withdrawn, which dilutes taxation.

In terms of transmission, death is generally seen as a fixed rule for this type of contract. As soon as it has been supplied before the insured is 70 years old, the capital of the contract is transmitted to the chosen beneficiary, who benefits from a high reduction (152,500 euros), cumulating with that applicable to inheritances. The balance is then taxed from 20% to 31.25% regardless of the relationship, a necessarily attractive rate because inheritance tax reaches 45% between parent and child and up to 60% in the most expensive case! However, it is actually impossible to determine with precision the taxation that will actually be applicable to the contract. Especially if the insured is young and dies fifteen years later, or even more…

The electoral period we are going through is thus a source of legitimate concern for individuals. The taxation of individuals is at the heart of political programs, as has been the case for the taxation of capital gains for twenty years, which has undergone seven major changes during the sole mandate of President Hollande. Hence an increase in the number of small holdings, formed for the sole purpose of obtaining stability. Indeed, the reforms are rather concentrated on individuals and little on companies.

Diversify holding envelopes

It will therefore be understood that life insurance should not be subject to an excessive allocation on the part of its subscribers. Holders of life insurance contracts are invited to manage the risk by subscribing to other products in parallel.

We can thus cite capitalization contracts. This envelope indeed offers the same advantages as life insurance during the savings phase, and compensates for a taxation which seems higher for the transmission by undeniable facilities. It is for example possible to make donations, in bare ownership or in full ownership, during one’s lifetime to control taxation, and even limit it. This has the additional effect of purging latent capital gains[1]and the donor can take charge of the rights himself without this being considered as an additional donation.

Looking for products with a more stable regulatory framework must be done together with the choice of riskier products, even if it means giving up a share of the potential returns. In this case, it is useful to ask the question of taking out a capitalization contract rather than a life insurance contract, or in addition, to accommodate any capital gain. Force of habit and commercial pressure are not necessarily good advisers.

On the contrary : comparing investment solutions, diversifying one’s assets both in terms of holding envelopes, signature and asset classes is relevant for long-term investing.

Favor the investment perspective over the tax optimization objective

The tax benefits attached to an investment may be called into question by the regulations at any time. Hence the complex layers of taxation that apply in particular to life insurance. This is why it is always risky to implement strategies focused on tax optimization.

A common sense approach is to select investments and then think about optimizing their taxation: an investment with little or no tax can be made directly, an investment subject to several successive levies must be made via an appropriate envelope or via a holding company . It is by decoding the opportunities of the current regulations and by diversifying envelopes, issuers, tax regimes… that we build a balanced heritage.

Life insurance is often perceived as an essential part of traditional investments, and represents the leading savings product in France. But fiscal instability poses unknown risks to policyholders and contract beneficiaries, especially for the youngest. There is no martingale!

[1] In the event of a donation in bare ownership, the latent capital gain is only purged on the transferred right – the bare ownership – but remains taxable on the usufruct.

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