Life Insurance: A Tax Advantage to Take Advantage Of in 2024
Given recent tax changes and the rules governing life insurance, 2024 could be a strategic year for some taxpayers. Here’s an analysis of the opportunities and trade-offs to consider when optimizing your policy redemptions.
Life Insurance Surrenders: The Tax Benefit of Policies Taken Out Before 2017
Life insurance policies taken out and funded before September 27, 2017, offer particularly attractive tax benefits, especially if they have been in force for more than eight years. These policies allow policyholders to benefit from an annual deduction on the taxable portion of gains, set at:
€4,600 for a single person, representing a potential income tax (IR) reduction of €345;
€9,200 for a couple, with an income tax reduction of up to €690.
This tax deduction, combined with a flat tax rate of 7.5% on gains after 8 years, makes these redemptions very advantageous. In short, investors can recover a portion of the tax paid when filing their tax return in year n+1. This is an opportunity not to be overlooked for maximizing after-tax returns.
2024: A Key Year Before the New Differential Contribution
For taxpayers subject to the exceptional tax on high incomes (CEHR), a new tax requirement arising from the 2025 Finance Bill (PLF 2025) is on the horizon: a 20% differential tax on redeemed gains. However, this provision will not take full effect until 2025, giving savers one last chance in 2024 to optimize their withdrawals.
Who is affected?
Single individuals with reported income exceeding €250,000.
Couples with reported income exceeding €500,000.
In 2024, earnings from contracts entered into before September 27, 2017, will be exempt from this differential contribution. However, they will remain subject to standard income tax, namely:
15% for contracts of less than eight years;
7.5% for contracts of more than eight years.
What options are available to high-net-worth taxpayers?
Affected taxpayers who need liquidity to maintain their standard of living or finance specific projects might consider cashing out in 2024 before the new tax takes effect. However, exceptions exist for policyholders aged 70 or older, for whom life insurance continues to offer significant estate planning benefits in terms of asset transfer.
What trade-offs do savers face?
In light of these tax issues, savers need to ask themselves the right questions:
Are your contracts more than 8 years old? If so, the earnings are subject to a reduced tax rate and qualify for the annual tax deduction, making redemptions financially advantageous.
Does the CEHR apply to you? If your income exceeds the thresholds listed, 2024 is a crucial year for you to redeem your earnings without having to pay the differential contribution in 2025.
Are you considering passing on your assets? Savers who are 70 years old or close to that age should prioritize keeping the policies they purchased before turning 70, as these offer favorable tax treatment in the event of inheritance.
Sound advice for informed management
In an ever-changing tax environment, decisions regarding life insurance require a detailed analysis of your personal and financial situation. It is recommended that you consult a financial advisor or tax specialist to assess whether it would be advisable to surrender your policies in 2024 or to keep them for long-term strategies.
Under the new tax rules, life insurance remains a valuable investment vehicle, but the trade-offs you need to make now depend on your investment horizon and your wealth management goals.
