Life insurance is a contract that allows you to save with peace of mind while benefiting from attractive interest rates. Its tax system is particularly attractive. It depends in particular on the length of time the contract is held. In principle, you must wait 8 years to benefit from the income tax exemption provided.
Life insurance taxation is based on the transactions carried out
The taxation of life insurance contracts has been modified several times by successive finance laws. The taxation relating to inheritance tax is also different because the sums transferred through a life insurance contract are not included in the classic inheritance assets. Let’s find out what taxation applies to a life insurance contract depending on the transactions carried out.
What taxation is when no withdrawal is made?
If you do not make any withdrawals during the entire term of the contract, you benefit from a tax exemption on the interest generated. Indeed, the gains are only taxable in the event of partial or total redemption. However, the insurer can automatically deduct social security contributions from this interest.
What taxation in the event of partial or total redemption?
When you make a partial or total redemption, the gains generated will be taxed, unless you request an exit in the form of a life annuity. It should be noted that a total redemption results in the closure of the life insurance contract. All of the gains generated are therefore taxed.
Case of a partial redemption
If you make a partial surrender, the life insurance contract remains active and continues to generate value. The invested funds continue to generate interest and the tax bracket is calculated in proportion to the value of the contract at the time of the partial surrender. It is therefore possible to feed a life insurance contract with new payments after a partial surrender.
Life insurance policy interest tax rates
The tax rates applicable to the interest generated by the premiums paid are those of the income tax scale. However, you can choose to pay the Flat-Rate Withholding Tax (PFL): at this time, the tax rate varies from 3.5% to 7.5%, depending on the length of time the contract is held. Whether you are subject to income tax or the Flat-Rate Withholding Tax (PFL), you must also pay 17.2% in social security contributions.
Taxation of payments made from , 2024
For payments made on or after 2024, the interest generated is subject to the Flat Rate Tax (TFI). The Flat Rate Tax varies depending on the length of time the contract is held and the amount of payments made and not redeemed on all life insurance contracts or capitalization contracts as of December 31 of the previous year. You can choose to be taxed at the progressive income tax scale if it is more advantageous for you.
Regardless of the method of taxation you choose (TFI or IR), the operation is carried out in two stages. First, the insurer makes a mandatory and non-liberatory flat-rate deduction. Then, the tax authorities launch an adjustment the following year and will take into account the deductions already made, but also any deductions for contracts of more than 8 years.
Taxation is based on the length of time the life insurance contract is held
- When the subscription date of the life insurance contract is less than 8 years, the interest is subject to the Single Flat-Rate Deduction (PFU). Unless exempted, the insurer charges a flat rate of 12.8% on the premiums paid and the tax authorities deduct social security contributions of 17.2%, for a total of 30%.
- When the life insurance contract is more than 8 years old, the Flat Rate Tax (TFI) is linked to the amount of payments made and not redeemed on December 31 of the previous year. When the interest paid is less than 150,000 euros, you benefit from a reduced tax rate of 7.5%. When this ceiling is exceeded, the excess is taxed at 12.5%. It is the insurer (except in the case of exemption) who makes the mandatory deduction of 7.5% and the tax authorities deduct the additional social security contributions the following year.
There are also allowances for life insurance contracts: 4,600 euros for single people and 9,200 euros for a couple. After an audit, the tax authorities apply the allowance taking into account the order of priority.
Please note that you can choose a global progressive scale taxation when you file your income tax return. At that time, this method of taxation was applied to all capital income and is final for the current year.
Payments made on a life insurance contract may be exempt from income tax when the insured and his/her spouse encounter difficulties or when he/she requests the total redemption of the contract during the year following one of the following events: loss of employment, early retirement, disability or cessation of self-employment.
Taxation of life insurance contracts on the IFI
Only the Account Units of your life insurance contract may be affected by the IFI (Property Wealth Tax). When the Account Units represent a share greater than 20% of real estate assets (SCPI, OPCI, OPC, etc.), the IFI tax regime is applied.
Taxation of Life Insurance in the Context of an Inheritance
If the subscriber were to die, the amounts paid to the designated beneficiaries are not included in the estate and are not taxed as inheritances. If the designated beneficiary is the subscriber’s spouse or civil partner, inheritance tax does not apply when:
- The payments made and the interest does not exceed 152,500 euros. Beyond this threshold, a 20% levy is applied to the share granted to the beneficiary;
- When payments are made beyond the age of 70, an exemption is granted up to 30,500 euros. When this ceiling is exceeded, beneficiaries must pay inheritance tax on the interest generated.