Life insurance contracts are at the heart of long-term asset strategies because they are investment, tax and transfer vehicles. But rolling back legislation could actually undermine these arrangements. Insights from Sophie Noe, director of the Center for Heritage Experience at Cyrus Conseil.
Life insurance regularly undergoes major overhauls that make its use complex for individuals and professionals alike.
Life insurance, unstable regulatory framework
The tax system that applies to the latter in the event of death depends on the taxes in force at the time of the death of the person concerned, as well as the date of participation in the contract, the date of payments and the age of the insured at the time of payment. Taxes on withdrawals vary just as much depending on the reforms, bypassing the numerous, extensive, and already specific rules. So there is a political risk to changing the rules. However, the effects of instability on redemptions are mitigated by the life insurance process itself: in the case of a partial redemption, only the interest share of the redemption is considered taxable income. Thus the tax base is smaller than the cash withdrawn, which alleviates taxes.
In terms of dispatch, death is generally seen as an established rule for this type of contract. Once it is provided before the insured reaches the age of 70, the capital of the contract is transferred to the selected beneficiary, who benefits from a significant reduction (152,500 euros), accumulating with the reduction applicable to the inheritance. The balance is then taxed from 20% to 31.25% regardless of the relationship, which is a necessarily attractive rate because the inheritance tax is as high as 45% between parent and child and goes up to 60% in the most expensive case! However, it is actually impossible to accurately determine what taxes will actually apply to the contract. Especially if the insured was young and died after fifteen years or more…
The electoral period we are going through is therefore a legitimate concern for individuals. Taxing individuals is at the heart of political programs, as has been the twenty-year capital gains taxation, which underwent seven major changes during President Hollande’s single term. Hence, there has been an increase in the number of smallholdings, which were formed with the sole purpose of obtaining stability. In fact, the reforms focus on individuals and less on companies.
Diversity of carrying envelopes
So it will be understood that life insurance should not be subject to excessive allocation on the part of the subscribers. Life insurance contract holders are encouraged to manage risk by subscribing to other products in parallel.
Thus we can cite capitalization contracts. This circumstance actually offers the same benefits as life insurance during the savings stage, and offsets the seemingly higher taxes on transfer by the undeniable facility. It is possible, for example, to make donations, with bare or whole property, during his life to control, and even limit, taxes. This has the additional effect of eliminating the underlying capital gainThe donor can take responsibility for the rights themselves without considering this as an additional donation.
The search for products with the most stable regulatory framework should go hand in hand with the selection of riskier products, even if it means giving up a share of potential returns. In this case, it is useful to ask the question of concluding a capitalization contract instead of a life insurance contract, or in addition to it, to absorb any capital gains. Habit strength and trading pressure are not necessarily good advisors.
exactly the contrary : Comparing investment solutions, diversifying one’s assets in terms of holding envelopes, signature and asset classes is a good fit for a long-term investment.
Prioritize the investment perspective over the goal of tax optimization
The tax benefits associated with an investment may be called into question by regulations at any time. Hence the complex tax layers that apply particularly to life insurance. This is why it is always risky to implement strategies focused on tax optimization.
A common-sense approach is to choose investments and then consider optimizing their taxation: an investment with little or no tax can be made directly, and an investment subject to several consecutive fees must be made via an appropriate envelope or through a holding company. By deciphering the opportunities offered by current systems, diversifying envelopes, exporters, and tax systems… we build a balanced legacy.
Life insurance is often seen as an essential part of traditional investments, and is France’s leading savings product. But financial instability poses unknown risks to policyholders and contract recipients, especially for the youngest. There is no Martingale!
 In the case of a donation of bare property, the underlying capital gain is disposed of only on the transferred right – mere ownership – but remains taxable on the usufruct.