Life Insurance Taxation: Tailor It to Your Situation

Life insurance is a versatile investment that allows you to both pass on capital and generate supplemental income. However, its tax treatment is complex and depends on several factors: the nature of the transaction (transfer or surrender), the policyholder’s age, the term of the policy, and the timing of payments. Here is a guide to help you better understand these nuances.

Transfer of Capital: Different Tax Rules Before and After Age 70
• For payments made before age 70:
Beneficiaries receive an exemption of €152,500 per beneficiary. Above this amount, the transferred funds are taxed at 20% up to €700,000 and at 31.25% for amounts exceeding that threshold. This favorable tax treatment makes life insurance an essential tool for planning the transfer of assets.
• For payments made after age 70:
A total exemption of €30,500 applies to all beneficiaries. Premiums exceeding this threshold are subject to estate tax, but interest generated by the policy remains tax-exempt.

Surrenders: Tax treatment based on the policy term
• Before 8 years:
Capital gains are taxed at 12.8% (Flat Tax) or, upon request, at the progressive income tax rate. Social security contributions (17.2%) are added to this tax.
• After 8 years:
An annual deduction of €4,600 for a single person or €9,200 for a married couple filing jointly applies to the gains. After this deduction, gains are taxed at 7.5% for contracts with a balance of less than 150,000 €. For amounts above this threshold, an additional tax related to the flat tax (12.8%) may apply.

Special Cases and Specific Situations
• Contracts taken out before 1983:
Until 2019, these contracts were fully exempt from interest tax. This rule was repealed in 2020, bringing their tax treatment in line with that of other contracts.
• Lifetime Annuity Payouts:
The taxable portion of the annuity decreases as the beneficiary ages: 70% before age 50, 50% between ages 50 and 59, 40% between ages 60 and 69, and 30% for those over 70.
• Real Estate Investments and the Real Estate Wealth Tax (IFI):
Life insurance policies are generally exempt from the Real Estate Wealth Tax (IFI), unless they include unit-linked policies tied to real estate assets (SCI, SCPI). In this case, the amounts invested must be reported if the real estate assets exceed 1.3 million euros.

Social Security Contributions: An Unavoidable Tax
Gains from life insurance are subject to social security contributions at a rate of 17.2%. For euro-denominated funds, these contributions are deducted annually. For unit-linked policies, they are applied upon surrender.

Simplified Reporting Thanks to the IFU
To report life insurance income, insurers provide a Single Tax Form (IFU), summarizing the amounts to be included on the tax return. This simplifies the process for taxpayers, who must nevertheless verify the accuracy of the information.

Life insurance remains an effective tool for saving and passing on wealth, but its tax framework requires careful management. To maximize its benefits, it is advisable to take into account the specific features of each policy and seek professional advice if necessary.