Life Insurance: How to Choose Between a Cash Value Withdrawal and a Loan When Needed

If you have an urgent, one-time need for cash, you can make a partial withdrawal from your life insurance policy or request an advance on the accumulated value from the insurance company.

Life Insurance Surrender: A Permanent Withdrawal
Surrendering a life insurance policy allows you to recover all or part of your savings. It can be a full surrender, which terminates the policy, or a partial surrender, which allows you to keep the policy while withdrawing a portion of the funds. This option offers great flexibility to life insurance policyholders.
 

Advance on Accumulated Funds: A Loan Granted by the Insurer
An advance is a loan that the policyholder may request from the insurer, in accordance with the commitments made at the time of purchase. This advance is governed by specific rules established by the French Insurance Federation:
• The advance may not exceed 80% of the funds held in the policy and 60% for unit-linked policies.
• The advance is granted in euros.
• The policyholder must repay the advance within 3 years, renewable twice.
 

Taxation: A Major Drawback of the Redemption
The redemption is not a tax-neutral transaction. Interest earned on the policy is subject to taxation. After holding the policy for 8 years, the tax rate is 24.7% (instead of the 30% flat tax), with an annual tax exemption on gains of €4,600 for a single person and €9,200 for a couple. Before 8 years, gains are taxed at a flat rate of 30% or according to the income tax scale plus 17.2% in social security contributions.
 

The Flexibility of Policy Surrender to Finance Projects
Policy surrender allows you to access your savings freely by withdrawing the desired amount, without fees or interest (for policies with no surrender charges), subject only to applicable taxes. This option is ideal for financing projects such as the purchase of real estate or your children’s education.
 

The Pros and Cons of a Life Insurance Advance
Life Insurance Advances: Not Always an Option
The advance must be explicitly provided for in the contract, which is not always the case. It is therefore crucial to verify this option when taking out a life insurance policy.
 

The high cost of the advance due to interest
The life insurance advance is charged by the insurance company at a rate corresponding to the expected return, plus a fixed fee of up to 1% per year. This rate cannot be lower than the average rate on government bonds.
 

Risks Associated with Fluctuations in Financial Markets
If the life insurance policy is terminated before the advance is repaid, any unpaid amounts are deducted from the proceeds paid by the insurance company to the beneficiaries. If the value of the investment units is insufficient to cover the remaining balance due, the insurance company may claim the balance from the policyholder’s estate.
 

Tax Treatment of Life Insurance Advances: A Major Advantage
A life insurance advance is tax-neutral, which means that the amounts received are not taxed. However, if the advance is not repaid, it will be reclassified as a surrender and subject to applicable taxes.
 

Advance to Avoid Payment Fees in the Event of a Cash Shortfall
When repaying an advance, the insurer may not charge a payment fee. In the event of a cash withdrawal, new payments made to the policy may be subject to entry fees in accordance with the policy’s fee schedule.
Taking an advance on a life insurance policy should remain an exceptional measure, as frequent use could result in the advance being reclassified for tax purposes as a withdrawal.
 

Surrender or Advance: Which Withdrawal Method Should You Choose in the Current Climate?
Life Insurance Advances for Urgent, Short-Term Needs
An advance is better suited for one-time, immediate cash flow needs. It can serve as an alternative to consumer credit and is particularly relevant for older policies that have generated significant taxable gains, when the policyholder is certain they can quickly repay the funds received.
 

Life Insurance Surrender for Long-Term Projects Financed by Savings
Surrender is more appropriate for financing long-term projects when the capital spent cannot be quickly replenished. It is also more suitable for recent life insurance policies or those that have generated little interest, as well as for policyholders who pay little or no income tax (marginal tax rate of 0% or 11%).