Life Insurance: How to Optimize Your Withdrawals at Year-End

To finance a purchase, buy gifts, or make a donation, you may need to withdraw funds from your life insurance policy at the end of the year. However, by splitting this withdrawal into two parts, you can significantly reduce the applicable taxes.
 

In fact, after eight years of holding the policy, the life insurance policy qualifies for favorable tax treatment: each year, you benefit from a tax exemption of 4,600 euros on your earnings (and 9,200 euros if you are married). If your earnings are less than this amount, you will not owe any taxes upon withdrawal, except for the 17.2% in social security contributions.
 

This tax exemption on withdrawals is reset every January 1. You can therefore make a first withdrawal in late December and a second one in early January to take advantage of the exemption twice.
 

Example: An individual needs to withdraw 50,000 euros from their life insurance policy. Of this 50,000 euros, 41,000 euros represents premiums paid, and 9,000 euros represents investment gains. If they withdraw the entire amount at once in December, they will be taxed on the “gains” portion minus the tax deduction—that is, on 4,400 euros (9,000 – 4,600 euros)—at a rate of 7.5%. He will therefore pay 330 euros in taxes. His “after-tax” withdrawal will thus be limited to 49,670 euros.
 

However, he may also decide to carry out this redemption in two stages. In December, he withdraws 4,500 euros; therefore, he does not owe any tax, since the withdrawal is less than the 4,600-euro exemption. 

In January of the following year, he requests a second withdrawal of 4,500 euros: again, he owes nothing, since his tax exemption has been restored. Thus, by waiting just a few weeks—or even a few days—his tax bill drops from 330 euros to zero, and, when adding the 1,000 euros recovered from the “contribution” portion, the total withdrawal does indeed amount to 50,000 euros.
 

To be perfectly precise, however, you will not be exempt at the time of redemption. In fact, for payments made after September 26, 2017, the insurer withholds a flat-rate deduction of 7.5% on gains with each withdrawal. Then, if it turns out that the taxed portion was in fact eligible for the deduction. The account holder is reimbursed in the form of a tax credit on their tax return for the year following the redemption.