The Capitalization Contract: An Alternative to Life Insurance

A capitalization contract is often considered a prime alternative to life insurance. Although they share similar characteristics, there are several differences between them. 

First of all, unlike life insurance, capitalization contracts are available to legal entities. Furthermore, it is not necessary to name beneficiaries in the event of death. Finally, this type of contract has specific tax characteristics that we will explore.
 

What Is a Capitalization Contract?
A capitalization contract is a savings product designed to build up capital over the medium or long term. Its term is generally set between 8 and 30 years. Returns accumulate through investments in various financial instruments, such as euro-denominated funds and unit-linked funds—that is, funds that can be invested in the stock market or real estate. These funds remain accessible at all times through various options: full redemption, partial redemption, or scheduled partial redemption.
 

Transferring a Capitalization Contract Through a Gift
When it comes to gifts, each parent may give €100,000 to each of their children every 15 years, while a grandparent may give up to €31,865 to each of their grandchildren at the same intervals. For a capitalization contract, the gift can be made in two ways:
 

1. Full ownership: The contract is transferred in its entirety to the donee, and gift tax is calculated based on the value of the contract on the date of transfer, including premiums paid, capital gains, and interest, after deducting the exemption.
2. Separation of ownership: The owner of the contract may transfer it while retaining the usufruct. Gift taxes are then reduced to the value of the bare ownership of the contract, depending on the donor’s age (50% for those aged 51–60, 60% for those aged 61–70, and 70% for those aged 71–80). The bare ownership is transferred first, and the usufruct is transferred only after the donor’s death.
 

Transferring a Capitalization Contract Through Inheritance
A capitalization contract is subject to the general rules of inheritance law. Upon the policyholder’s death, the value of the contract is included in the estate along with the decedent’s other property and assets. The heirs must then pay inheritance tax according to the applicable rates, after applying the exemptions calculated based on family relationships.
 

Changes to the Tax Treatment of Life Insurance Policies
On October 17, members of the National Assembly adopted an amendment aimed at modifying the special tax treatment of life insurance policies upon transfer. The amendment proposes applying the model used for inheritance tax on direct descendants to policies for which premiums were paid before the policyholder turned 70. This could make life insurance more tax-burdensome in the context of an estate.
 

Currently, payments made before age 70 into a life insurance policy are exempt from inheritance tax up to €152,500. Above that amount, a 20% tax applies up to €700,000, and 31.25% applies to amounts above that threshold. If payments are made after age 70, inheritance tax is due on the portion of the premiums exceeding €30,500, divided among the beneficiaries.
 

Congressman Jean-Paul Mattei proposes to align the taxation of the transfer of life insurance policies with that of direct-line inheritances. The tax schedule would thus be modified as follows: after a deduction of €152,500, the remaining amount would be taxed at 20% up to €552,324, then at 30% up to €902,838, at 40% up to €1,805,677, and finally at 45% above that amount. This amendment will be reviewed and voted on again in a public session beginning on October 21.
 

Capitalization contracts offer specific advantages over life insurance, particularly in terms of asset transfer and taxation. The proposed changes to life insurance policies could influence investors' decisions.