Myth: life insurance is not a good investment after 70
Article up to date at 1 November 2020, drafted in accordance with French legislation in force, and applicable to individuals whose tax residence is in France.
Article 990 I of the French tax code permits an allowance of €152,500 in death benefits per beneficiary at a tax threshold of 31.25%. However, the death benefits linked to the premiums paid into a life insurance policy after age 70 are not entitled to these provisions. Should one therefore systematically rule out paying into a life insurance policy after 70? Read on.
Life Insurance policy in a nutshell
A life insurance policy is an investment vehicle that allows you to accumulate income and make withdrawals. Should you decide to partially redeem your policy, only the share of interest earned on that redemption is taxable. Let’s say you took out a policy three years ago and invested €1,000K in it, and that today that amount is worth €1,150K. Assuming that you redeem the equivalent of the unrealized capital gain, i.e. €150K gross, only €20K will be taxed(1). There will therefore be a tax cost of €6K (30% flat tax excluding the possibility of an exceptional tax on high income and unless opting for the progressive scale for income tax), and the net redemption amount will be €144K. In other words, life insurance is first and foremost a capitalisation vehicle for investing liquid assets under sound conditions.
Transferring death benefits
Life insurance is also used for succession purposes: upon the policyholder’s death, regardless of his or her age, the ownership of the proceeds of the policy are transferred to the expressly designated beneficiary or beneficiaries — who may or may not be heirs of the deceased. Indeed, by law the death benefits received by one or more beneficiaries are not considered as assets of the policyholder’s estate. That said, life insurance should not be used as a means to disinherit one’s heirs, as premiums deemed as manifestly excessive risk being included into the estate! To make full use of life insurance as an instrument for transferring one’s wealth, special attention needs to be paid to how the beneficiary clause is drafted rather than automatically approving the standard clause prepared by the insurer. A more personalised and perhaps more sophisticated clause drafted with the help of an expert may prove to be particularly effective.
What is the differents made between payments made before 70 and after 70 from a tax perspective?
The taxation on death benefits linked to the premiums paid before the policyholder turns 70 may at first seem more attractive than the taxation on premiums paid after 70:
In the first case, death benefits are excluded from estate assets, and are included in the second case;
There is an allowance of €152.5K per beneficiary in the first case, versus a total allowance of €30.5K in the second case;
In the first case a specific levy with a 31.25% marginal rate of is applied, whereas in the second case inheritance tax with a 45% marginal rate is applied for direct-line beneficiaries, and a 60% marginal rate for third-party beneficiaries
Remember that for payments into your life insurance policy after 70, only the amount of premiums paid are subject to inheritance tax. However, the proceeds of the life insurance policy are exonerated from inheritance tax. So, depending on your objectives, having a life insurance policy after 70 could prove a very worthwhile strategy.
Example: Life Insurance after 70 as tool for transferring your estate to your grandchildren (2)
Earlier we saw how parties who are not considered heirs of the estate can be designated as beneficiaries in the policyholder’s life insurance policy. Therefore, provided a clause has been adequately drafted to this effect, the policy can be used to transfer liquid assets to the policyholder’s grandchildren who can benefit, where applicable, from the progressive scale on inheritance tax rates (5%, 10%, 15%, 20%, 30% above €550K, then 45% above €1,800K). For example: a 71-year-old policyholder wishes to invest in one year €1,000K that she plans to leave to her four grandchildren after her death. She passes away four years later. The policy is now worth €1,500K thanks to the investment products. Each grandchild receives €375K.
If the initial amount had been invested in a securities account, for instance, the €1,500K would have been considered as an estate asset and therefore included in the inheritance tax calculation. If, by way of a testamentary provision, the deceased had bequeathed this asset to her grandchildren, the cost would be approximately €75K, leaving each grandchild with €300K net(3)
However, if the initial amount had been invested in a life insurance policy, the grandchildren would only be taxed on the total of the premiums paid (i.e. €250K per policy):
After an allowance of €30,500 for all the premiums paid after the age of 70;
With application of the of the direct-line inheritance tax scale (with various allowances, if not used elsewhere)
The cost would therefore be limited to approximately €48K per grandchild who will have €327K to put towards their life plans. Therefore, dismissing life insurance after 70 on the grounds that it is not a good investment is not a sound argument. At Societe Generale Private Banking, a Wealth Engineer is ready to assist you alongside your Private Banker in defining a bespoke strategy to achieve your objectives.
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(1) Amount of partial redemption — All premiums paid up to the date of the partial redemption x (Amount of partial redemption/Total value of redemption on the date of the partial redemption), i.e. 150 — (1,000 x 150/1,150).
(2) Excluding manifestly excessive premiums.
(3) Application of the direct-line inheritance tax scale after an allowance of €1,594 per grandchild on the value of the asset, i.e. €375K.
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