Can you give away your life insurance policy while you're still alive?

Life insurance is often touted as the quintessential wealth management tool for the French. With nearly 2,100 billion euros in assets under management, it is the preferred investment of French households. While its advantages in terms of estate planning are well known, one question frequently arises: Is it possible to transfer a life insurance policy during one’s lifetime, in the form of a gift?
 

Life Insurance: A Tool Designed for Post-Mortem Asset Transfer
Life insurance is legally defined as a contract that takes effect upon the policyholder’s death. It operates through a beneficiary designation mechanism that is incorporated into the contract at the time of purchase. The policyholder designates one or more individuals who will receive the lump-sum payment or annuity upon the policyholder’s death. These beneficiaries may be individuals (spouse, children, parents, friends) or legal entities (associations, recognized public-benefit foundations).
 

The beneficiary clause is at the heart of the arrangement. It determines who will receive the funds and in what proportions. Special care must be taken when drafting it: a vague or ambiguous clause can lead to difficulties in interpretation when the policy is settled. Experts recommend using specific terms (last name, first name, date and place of birth) rather than generic expressions such as “my spouse” or “my children,” which can lead to confusion in the event of remarriage or a blended family.
 

One of the fundamental aspects of life insurance is that the death benefit remains the sole property of the policyholder as long as he or she is alive. The designated beneficiaries have no vested right to the funds prior to the policyholder’s death. They have only a simple expectation—that is, a legal expectation that will only materialize upon the policyholder’s death. This characteristic fundamentally distinguishes life insurance from other wealth-transfer mechanisms, such as gifts or the division of property.
 

The Legal Impossibility of Donating a Life Insurance Policy
The principle is clear and unequivocal: it is not possible to donate one’s life insurance policy during one’s lifetime. This impossibility stems from the very nature of the life insurance policy. The Insurance Code does not provide for any mechanism allowing the transfer of ownership of the policy or the early payment of the death benefit to the designated beneficiaries prior to the policyholder’s death. Such a transaction would be contrary to the very essence of life insurance, which is based on an uncertain event: the death of the insured.
 

Even if a beneficiary is designated, that beneficiary cannot demand payment of the funds before the policyholder’s death. Early payment to the beneficiary is simply not provided for under the legal terms of the contract. Any attempt to circumvent this rule would be null and void from a legal standpoint.
 

However, the policyholder retains full control over the management of their policy throughout their lifetime. They may make additional contributions, reallocate funds among the various investment vehicles, request advances, and make partial or total surrenders. They may also change the beneficiary designation at any time, except in the case of a designated beneficiary who has accepted the designation. This freedom of management ensures that the policyholder retains complete control over their savings throughout their lifetime.
 

The Alternative Solution: Surrender Followed by a Gift
Although it is not possible to directly gift a life insurance policy, there is an alternative for transferring the funds during one’s lifetime. This solution involves surrendering the policy, either in full or in part, followed by a standard gift of the proceeds received. Life insurance is, in fact, a liquid investment: the policyholder may request the surrender of their savings at any time, subject to compliance with any specific terms of the policy.
 

Surrender is carried out by simply submitting a written request to the insurer or the managing institution. In the case of a full surrender, the policy is terminated and the entire policy value is paid to the policyholder. In the case of a partial surrender, a portion of the policy value is paid out and the policy continues with the remaining balance. Once the funds have been deposited into the policyholder’s bank account, the policyholder is once again free to use them as they see fit. They may then make a cash gift to the person of their choice, in accordance with standard gifting rules.
 

This gift will fall outside the specific framework of life insurance and instead be governed by general gift tax law. It will therefore be subject to the usual rules: compliance with the reserved portion, application of exemptions, and the tax schedule based on the family relationship between the donor and the recipient. The standard tax exemptions apply: 100,000 euros between parents and children, 31,865 euros between grandparents and grandchildren, and 80,724 euros between spouses or civil partners (PACS); these exemptions are renewed every 15 years.
 

The tax implications of this strategy
This alternative solution is not tax-neutral and warrants a thorough analysis before any decision is made. Upon surrender of the life insurance policy, taxes apply only to the portion corresponding to gains (interest and capital gains). The initial principal paid in is not taxed. After applying the annual tax exemption of 4,600 euros for a single person (9,200 euros for a couple), the gains are subject either to the single flat-rate tax (PFU) of 12.8% (plus 17.2% in social security contributions) or to income tax according to the progressive tax scale if that option is more favorable.
 

For contracts lasting more than eight years, a reduced tax rate of 7.5% (plus social security contributions) applies after the deduction. Subsequently, when the recovered funds are donated, the general tax rules for gifts apply, with deductions and tax brackets based on the family relationship.
 

It is essential to compare this buyback-donation strategy with keeping the policy in force until death. Indeed, life insurance benefits from very favorable inheritance tax rules: funds transferred upon death are exempt from inheritance tax up to a limit of 152,500 euros per beneficiary for payments made before age 70. It is recommended to consult with a wealth management advisor or a notary to determine the solution best suited to each individual’s situation.