Life insurance and death insurance in France are two distinct financial instruments that often get intertwined. However, they serve very different purpose, one being an investment and the other an insurance policy. Let’s delve into the specifics of these contracts, their characteristics, and the purposes they serve.
Table of contents
Life insurance: A strategic financial investment
Life insurance serves as a saving investment and constituted a significant portion of the financial assets of the French population in 2022, as reported by the Banque de France. When you enter into a life insurance contract with a bank or an insurer, you commit to making premium payments, either as a lump sum or at regular intervals, with the aim of accumulating capital. Upon the contract’s maturity, the designated beneficiary, which can be you or a third party specified in the contract, receives the accrued capital or an annuity.
Various types of life insurance contracts
There are two primary types of life insurance contracts:
- Single-support contact (Euro funds): This type of contract is favoured by savers. Payments made into a euro fund come with a guarantee in exchange for a limited return.
- Multi-support contract (Unit-linked contract): These contracts generally comprise a portion invested in euros and units of account. Unit-linked life insurance carries more risk compared to the euro fund, as the returns on your payments are not guaranteed. The investment is influenced by fluctuations in the financial markets.
It is advised to adopt a long-term perspective when investing in units of account to mitigate the impact of market volatility and maximise earning potential.
Flexibility and favourable taxation
One of the standout features of life insurance is its flexibility and tax benefits. As a policyholder, you have the freedom to make partial surrenders or a complete redemption of your accumulated capital whenever you see fit. However, this is subject to one crucial condition: the designated beneficiary (who may be someone other than the policyholder) must consent to this withdrawal in writing, after accepting their designation as beneficiary.
A total surrender results in the termination of the contract. Additionally, you can request an advance from your insurer, which is essentially a loan provided by them. The interest on this advance is charged at the rate specified in the contract.
Optimal taxation after 8 years
Capital gains realised during a partial or total withdrawal are subject to varying tax regulations depending on factors such as the contract’s commencement date, payment dates, and the amount of your contributions. The tax situation is most favourable after a holding period of 8 years.
For premiums paid from September 17, 2017, capital gains are subjected to the single flat-rate withholding (PFU) of 30% if the contract is between 0 and 8 years old. Beyond 8 years, you can benefit from an annual reduction of 4,600 euros (9,200 euros for a married couple) and a tax rate (income tax and social security contributions) of 24.7% on capital gains if the premiums paid are less than 150,000 euros.
Life insurance also proves to be a valuable tool for estate planning. Through the beneficiary clause, you can designate one or more beneficiaries. This investment avenue provides a degree of insulation from inheritance rules, particularly in terms of the hereditary reserve.
Contracts registered in the name of a spouse or PACS partner, specific non-profit organisations, and for the benefit of siblings (subject to certain conditions) are exempt from inheritance tax. In other scenarios, the capital may be subject to taxation based on the contract’s commencement date, payment dates, the policyholder’s age at the time of payments, and the amount of capital disbursed to the beneficiary.
Death insurance: Shielding your loved ones
Death insurance, in contrast, is an insurance policy that involves paying premiums to the insurer, who will, in turn, provide a capital payout to your beneficiaries upon your demise. Unlike life insurance, you cannot be the beneficiary. You must designate one or more individuals as beneficiaries when you initiate the contract. Additionally, the amount of capital disbursed is established at the outset of the contract.
Safeguarding your loved ones financially
Death insurance serves as a financial safety net for your loved ones, offering protection against the uncertainties of life, especially in the event of your passing or if you become disabled due to an accident. Depending on the terms of the contract, compensation may be provided in scenarios such as accidents resulting in death or disability, certain illnesses (provided they are declared after the commencement of the death insurance contract), and under specific conditions, suicide.
Understanding the costs
Unlike life insurance, the premiums paid for death insurance are non-refundable. Therefore, should you decide to terminate your death insurance, you will not receive a capital sum equivalent to the premiums paid. The cost of death insurance varies depending on the contract terms and the capital amount earmarked for the beneficiaries. It is also influenced by individual factors such as your age at the initiation of the contract, your lifestyle (smoker or non-smoker), and your health status.
Taxation of death insurance capital
The capital paid out to the beneficiaries is not considered part of the estate and, consequently, is exempt from inheritance tax. However, this exemption is contingent on certain conditions. Contributions made after your 70th birthday are reintegrated into your estate and subject to taxation along with your other assets. Additionally, the capital provided to beneficiaries may be liable to income tax. Any portion of the death benefit exceeding 152,500 € is subject to income tax, up to the total amount of the last annual contribution paid before the policyholder turns 70, at a tax rate of 20%.
Useful resources
Banque de France – Official Website: The official website of the Banque de France provides a wealth of information on financial matters, including savings, investments, and economic policies. Visit the website.
French Insurance Federation (FFA) – Official Website: The French Insurance Federation’s official website offers comprehensive insights into the insurance sector in France, including various types of insurance and regulations.
Visit the website.
French Ministry of Finance – Official Website: The official website of the French Ministry of Finance covers a wide range of financial topics, including taxation, budgeting, and economic policies.
Visit the website.
Final notes
While life insurance and death insurance may seem similar on the surface, they serve distinct purposes and have their own unique features. Life insurance operates as an investment vehicle, allowing you to build up capital over time, while death insurance serves as a safeguard for your loved ones, providing them with financial support in the event of your passing. Understanding the differences between these two types of contracts is essential for making informed financial decisions.
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