What is life insurance? A financial product like any other? Not precisely, and we’ll show you why. Indeed, life insurance has something more, a je ne sais quoi that makes it the favorite financial product of the French. It is a veritable Swiss army knife and knows how to adapt while remaining an excellent savings product. To better understand it, you must already understand it. What is it used for? How much can you put on it? What is its tax? So many questions whose answers may allow you to take the plunge.
Definition: what is life insurance?
Life insurance is a contract by which the insurer undertakes to pay an annuity or capital to a person, the subscriber, in return for a premium. This payment is made according to the type of contract taken out. Indeed, in a life insurance contract, it is necessary to distinguish between an insurance contract in the event of death and an insurance contract in the event of life.
What is the principle?
First of all, it is good to ask yourself how life insurance works. Life insurance is first and foremost a savings product. Unlike other contracts, it can be kept for life or a shorter period, depending on your needs. Once the contract has expired, the money collected on the life insurance will return to the beneficiaries previously designated by the insured. The latter will receive the sums invested increased by any gains and reduced by the costs. These amounts will fluctuate depending on the medium chosen and the investments made.
What qualifies life insurance is freedom. Indeed, once the opening of the contract and the initial payment are made, you can manage your life insurance as you see fit. Make regular or irregular payments, no amount limit. Despite this great freedom, know that it is still more interesting not to make any withdrawals before the eight years of your contract? You can do it, but it will be less fiscally attractive. Finally, you have the right to terminate your agreement or make withdrawals.
On the management side, you have three choices:
- free management (you decide on the distribution and arbitration),
- delegated administration (with your advisor)
- subscribe to automatic management options (progressive investment, securing capital gains, automatic rebalancing, etc.).
life insurance
The risk guaranteed here is the life of the insured. The capital is paid to the insured at the end of the contract if the latter is still alive. In this type of contract, the insured can be the beneficiary.
Insurance in the event of death
In death insurance, the risk materializes if the insured dies before the end of the contract, the capital (increased or reduced by capital gains) will be paid to the beneficiary designated by the subscriber. The designated beneficiary must be different from the subscriber.
Life insurance: how does it work?
Payments in a life insurance policy
Periodic payments
The subscriber must commit to payment according to a monthly, quarterly, or annual schedule. This type of payment leaves the choice to the subscriber who can make additional payments.
Free payments
As its name suggests, it is done freely. The subscriber chooses the amount and the date of the payment. However, there may be exceptions. Some contracts impose a fixed minimum amount.
The single payment
This type of payment is made in one go at the subscription time.
The actors in a life insurance contract
The insurer
The person undertakes to pay benefits when the insured risk materializes.
The subscriber
The natural or legal person takes out the contract with the insurer. He can be the beneficiary simultaneously, except in the case of insurance in the event of death. The underwriter can also be a bank or an insurance company in the case of group insurance.
The insured
This is the person on whom the insured risk rests. He can also be a subscriber at the same time.
The beneficiary
This is the person designated by the subscriber and to whom the capital will be paid in the event of realization or death. His presence is not compulsory at the time of subscription, and it is not mandatory to inform him of his status as a beneficiary.
Taxation of life insurance
As we told you above, life insurance is a fixed-term contract that allows you to benefit from tax exemption from 8 years of existence. You have heard that your capital gains are partially exempt from tax beyond this anniversary date. How does it work? It’s pretty simple. There is a tax of 7.5% on capital gains realized after an annual allowance of €4,600 for a single person and €9,200 for a couple.
Specifically, they are taxable:
- gains generated by contracts
- contract buyout.
Similarly, the levies will vary depending on the exit from the contract:
- capital outflow: the savings amount is paid out all at once;
- Withdrawal from a life annuity: the amount of the savings is transferred in the form of assistance until the insured’s death. This type of exit allows the insured to build up additional regular income;
- Total redemption: consists of the insured recovering the entire amount invested (capital + interest). This operation automatically leads to the termination of life insurance.
- Partial redemption: consists of the insured recovering part of the amount saved. The other part was remaining invested in the contract.
In the context of total surrender, the taxable gains correspond to the difference between the contract’s total value at the time of the submission and the payments made by the insured.
In the context of partial surrender, the taxable gains are calculated according to the formula below:
The tax reduction
The tax reduction concerns contracts taken out for disabled people. They apply:
- Contracts that guarantee the payment of capital or a life annuity to disabled people who cannot meet their needs; maybe a handicap savings contract. But this contract is for at least six years;
- It is the survival annuity contract for contracts taken out by people with disabled children and in favor of the latter.
