Life insurance

Definition and fundamental principle:

Life insurance is an insurance contract that allows the policyholder to build up capital over the medium or long term, while preparing the transfer of their wealth within a favorable tax framework.

This life insurance savings product allows premiums to be invested across a range of investment vehicles and can serve multiple objectives: building capital, generating supplementary income through withdrawals or annuity payments, and transferring wealth to designated beneficiaries in the event of death.

The main objectives:

Life insurance serves to meet several key goals, combining savings, wealth transfer, and tax optimization.

Contract Operation:

Thanks to its flexibility, life insurance adapts to your subscription choices, payments, and investment options to best meet your wealth management objectives.

Subscription and Payments

• Subscription can be individual or joint (depending on the marital regime).
• Payments can be made freely or on a scheduled basis according to the subscriber’s needs and saving capacity.

Investment Options 

• Euro-denominated fund: investment vehicles that offer security through capital protection and a stable return (the rate is generally lower than that of certain other investments and is determined annually by the insurer).
• Unit-linked funds: various options (equities, bonds, real estate, structured products) offering higher return potential but without capital guarantee. These funds are subject to financial market fluctuations.

Contract Duration

• Flexible duration, with the possibility of partial or full withdrawal at any time.
• Recommended investment horizon of 8 years to optimize life insurance taxation and fully benefit from tax allowances.

Taxation of redemptions and tax benefits

When a withdrawal (partial or full surrender) is made from a life insurance policy, only the portion corresponding to investment gains included in the withdrawal is subject to income tax and social contributions; the capital originally invested is not taxed.

The applicable tax treatment depends primarily on the date the premiums were paid, distinguishing between premiums paid before and on or after 27 September 2017.

For premiums paid before 27 September 2017, gains are taxed either under the progressive income tax scale or, upon election, under the flat-rate withholding tax regime (prélèvement forfaitaire libératoire). Before eight years of policy ownership, this flat-rate tax is set at 35% for withdrawals made within the first four years and 15% for withdrawals made between four and eight years.

After eight years, gains benefit from an annual allowance of €4,600 for a single individual or €9,200 for a couple. Any excess may then be taxed either under the progressive income tax scale or at a flat rate of 7.5%.

For premiums paid on or after 27 September 2017, gains are generally subject to the flat tax (Prélèvement Forfaitaire Unique – PFU). Before eight years, gains are taxed at a flat rate of 12.8%, unless the taxpayer opts for taxation under the progressive income tax scale.

After eight years, gains benefit from the same annual allowance of €4,600 for a single individual or €9,200 for a couple. They are then taxed at a rate of 7.5% provided that the total amount of premiums paid across all life insurance policies does not exceed €150,000. Above this threshold, the portion corresponding to premiums up to €150,000 remains taxed at 7.5%, while the excess is taxed at 12.8%.

In all cases, gains are also subject to social contributions at a rate of 17.2%, as well as, where applicable, the exceptional and differential contributions applicable to high-income taxpayers.

Beneficiary clause and estate transfer

The beneficiary clause allows the free designation of one or more persons who will receive the capital in the event of the insured's death. This provision offers great flexibility to organize estate transfer outside of inheritance, with partial or total exemption from inheritance tax within certain limits. It requires beneficiary clause wording that is tailored to the policyholder’s family circumstances and intended objectives.

Taxation related to Real Estate Wealth Tax (IFI)

Unit-linked investments with exposure to real estate assets are included in the taxable base for the Real Estate Wealth Tax (IFI) in proportion to their real estate component.

Luxembourg life insurance: an additional option

A Luxembourg life insurance policy provides a specific regulatory framework (the “Triangle of Security”) and access to dedicated or collective internal funds, together with a broad range of investment options. There is no withholding tax on income from Luxembourg sources for non-residents. The applicable tax treatment depends on the policyholder’s country of tax residence.

Advantages of life insurance

This solution combines major benefits in terms of taxation, flexibility, and investment choices, thereby offering a privileged framework to grow and transfer your wealth.

Specific Use Cases

Life insurance adapts to different life situations, offering concrete solutions to prepare for retirement, organize wealth transfer, and ensure your family’s financial security.

• Retirement Preparation: Using life insurance as a supplementary income through scheduled withdrawals or an annuity.
• Wealth Transfer: Designation of specific beneficiaries to transfer capital outside of inheritance, benefiting from favorable taxation.
• Family Protection: Payment of a death benefit to designated beneficiaries, ensuring financial protection in the event of the insured’s passing.

Associated Risks

Like any investment, life insurance carries certain risks that it is important to understand in order to make informed decisions adapted to your profile.

Glossary