Life insurance and inheritance tax

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Life insurance protects or favors one or more people in the event of death. The tax treatment for paid-in capital varies depending on the contract and at times waivers inheritance tax

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What is life insurance?

Life insurance is a contract by which the insurer or the bank undertakes to pay a capital sum to a named person in the event of the policyholder's death,  or improve their quality of life during retirement.

Life insurance is part of financial investments. In fact, there are many different life insurance investments. This investment has a clause which makes it possible to choose to whom to transmit the capital or the annuity in the case of death.

Certain circumstances also make it possible to make withdrawals from this investment while benefiting from an exemption from income tax: dismissal, early retirement, invalidity, liquidation. These circumstances may concern savers, but also their spouse.

Besides from these cases, the withdrawal of life insurance is subject to income tax. However, the amount of tax depends on the date of conclusion and the length of time the investment was held.

As a result, life insurance investments make it possible to transmit capital or an annuity, but also to build up savings that will grow, through the payment of capital or periodic premiums.

The savings remain available. The saver can redeem his capital, partially or totally, at any given time. This is why life insurance is also a solution to anticipate retirement or a project.

Life insurance also meets an objective of diversifying financial support. Savings are invested in funds in euros or in units of account.

Unit-linked life insurance contracts are investments in which savings are invested in different media, but which involve a certain risk for the insured. Conversely, life insurance in euro funds is a financial support where the capital is guaranteed.

How to name the beneficiary(ies) of life insurance ?

The subscriber is of course completely free to designate the beneficiary or beneficiaries of his choice. He can do so at any given time, either on the day when the contract is signed with the insurer, or afterwards... In practice, this designation is mentioned in writing on the insurance contract itself or on another document, like a will for example.

The major advantage of the designation of the beneficiary by will is bound to absolute secrecy. The subscriber retains complete freedom, especially if he wishes to change beneficiaries (thus he doesn’t need to justify himself). However in this case, it is advisable to specify in the insurance contract that the beneficiary will be designated by will, not forgetting to mention, if applicable, the contact details of the notary depositary, of the deed.

Are life insurance contracts subject to inheritance tax?

On the subscriber’s death, the sums paid to the beneficiary of the life insurance contract do not form a civil part of the estate of the deceased. Contracts taken out for the benefit of a spouse or civil union partner, certain non-profit organizations and, under certain conditions, contracts taken out for the benefit of brothers and sisters, are exempt from any taxation.

However, part of the capital may be taxable depending on:

  • the date of subscription of investments or payments,
  • the age of the saver when making the payments,
  • of the capital paid to beneficiaries.

When other beneficiaries have been designated, the rules are as follows:

  • For contracts subscribed after November 20, 1991, on the death of savers, the share of capital corresponding to premiums paid by the subscriber after his 70th birthday is subject to inheritance tax (according to the rules of common law) for their fraction that exceeds 30,500€;
  • Before the age of 70, a specific flat-rate deduction after application of a reduction of 152,500€ per beneficiary, applies to the sums received by the beneficiary(ies) when they correspond to premiums paid by the subscriber since the 13th. October 1998 (including those paid by an insured aged over 70 on a contract, taken out before November 20, 1991); its rate is 20% on the taxable fraction of each beneficiary, which does not exceed 700,000€ and goes beyond 31.25% .
  • An additional reduction of 20% applies before the reduction of 152,500€ in the case of a " life generation " contract in units of account.

Please note: In the absence of a beneficiary, life insurance savings are considered as estate assets. Thus, the investments will be taxable according to inheritance tax.

  • On the other hand, if the life insurance savings were made with mutual funds, the cash value of the contract is part of the assets of the community subject to inheritance tax. Half of the redemption value of the savings will be incorporated within the estate upon the death of the first spouse.

Do not hesitate to contact your notary. The latter shall give you advise on the most suitable contract, depending on the personal situation.

  • If you have already subscribed to a contract and wish to modify the beneficiary clause, the notary will support you and shall draft it.
  • If you are the beneficiary of a life insurance contract, also consult your notary before you move forward. It will help you understand the various tax implications.

Did one of your relatives has just died?

Refer to the guide "Estate settlement".