Life insurance is one of the most popular savings and investment products in France. Individuals subscribe to it to take advantage of the many wealth optimization opportunities that life insurance offers them. It is also distinguished by a specific legal framework and tax rules. These regulations facilitate the transfer of wealth and are advantageous in terms of inheritance.
Life insurance: what tax advantage in the context of an inheritance?
The taxation of life insurance makes it an ideal tool to improve the transmission of your assets because it allows you to reduce the applicable inheritance tax. It should be noted that life insurance can be treated outside of an estate, under certain conditions; it is for this reason that the amounts paid to the designated beneficiaries when the insured dies are not subject to inheritance tax.
Life insurance is not included in the estate assets, except for premiums paid after the subscriber reaches the age of 70 and exceeds 30,500 euros. Each beneficiary of the life insurance policy benefits from a tax reduction of 152,500 euros for contributions paid before the age of 70. In addition, the tax rate is only 20% up to 852,500 euros, regardless of the beneficiary’s relationship with the deceased subscriber. This tax rate is truly advantageous when compared to the rate applicable in the event of inheritance: for example, in the context of inheritance between collateral relatives, the tax rate is 35%.
Thus, life insurance is an interesting contract in the context of inheritance for the importance of the allowances granted (152,500 euros for each beneficiary), in addition to the allowances provided for in the context of the inheritance. Life insurance is exempt from transfer taxes and the gains generated after payment are also exempt. The marginal tax rates of 31.25% are more interesting compared to the 45% maximum marginal rate in inheritance tax in a direct line.
Who can benefit from a life insurance contract?
When taking out a life insurance policy, you must determine the beneficiary or beneficiaries. It should be noted that there are rules that will help you choose wisely. You are free to designate one or more persons through the beneficiary clause (and you can modify it at any time).
This freedom allows you to designate the legal entity or natural person of your choice: spouse, child, grandchildren, friend, lover, association, etc. The beneficiary can be designated in the life insurance contract or later in another document drawn up by the notary, such as the will for example. But this does not mean that life insurance is part of the estate assets.
At the time of death, the insurer will look for the beneficiaries, but they can also contact the insurer. Once the necessary administrative formalities have been completed, the funds accumulated with interest are released and the transfer is made outside the estate. The beneficiary clause is ideal for favoring a person who is not related or has a weak family relationship with the subscriber. If no beneficiary has been designated, all of the funds (capital and interest) will be reintegrated into the estate at the time of death and the planned tax benefits will be lost.
Taxation of life insurance in the event of the death of the policyholder?
The benefits of life insurance in terms of inheritance are undeniable. The heirs of the deceased policyholder benefit from a reduction on their share of the inheritance before inheritance tax is applied.
The amount of the allowance varies depending on the family ties of the beneficiaries with the subscriber. For example, if they are the children of the deceased, they benefit from an allowance of 100,000 euros. Beyond this threshold, the amounts transferred are taxed according to a progressive scale that varies from 5% to 45%. On the other hand, when a share of the assets is transferred to a person who has no family ties, the allowance granted amounts to 1,594 euros, with a tax rate of 60%.
With the life insurance contract, it is possible to pay no inheritance tax by transferring up to 152,500 euros per beneficiary. It should be noted that the amount that can be transferred without inheritance tax varies depending on the age of the subscriber at the time of payments made on the life insurance contract. For payments made before the subscriber’s 70th birthday, each beneficiary can benefit from an exemption from inheritance tax of up to 152,500 euros. For amounts paid after the subscriber’s 70th birthday, all beneficiaries will only receive 30,500 euros without paying inheritance tax. Therefore, it is not possible to benefit from an exemption from inheritance tax on a portion of your assets that is too high through your life insurance contract. Indeed, if the tax authorities consider that the amounts paid are “excessive”, they may decide to impose inheritance tax on you.