Everything You Need to Know About Life Insurance Limits

A life insurance policy is subject to strict rules regarding the transfer of savings and taxation. Certain limits have been set for these purposes—whether to protect beneficiaries, limit abuse, or, more broadly, allow for a form of tax optimization. In this guide, we provide an overview of the limits you need to know to best manage your life insurance policy.

Reminder Regarding the Life Insurance Policy

Life insurance is a savings product, just like a Livret A or an LDDS (sustainable and solidarity savings account). Offered by an insurer (or a distributor, as is the case with Raizers), the main benefit of this policy is to diversify and grow your savings. With this in mind, you are free to invest your money in various investment vehicles, such as stocks, bond funds, or real estate investment trusts (SCPIs), for example. You can also choose to entrust the management of your savings to the insurer, which typically works with an asset management firm.

Is there a cap on life insurance premiums?

In life insurance terminology, a payment (also known as a premium or contribution) refers to the act of contributing money to your policy. There are three main types of payments: 

• Initial payment: This premium allows you to officially open your life insurance policy. The minimum amount is set by the insurer and is generally between 100 and 1,000 euros; 
• Scheduled payments: To make regular contributions to your account and grow your savings, you can set up an automatic transfer from your bank account. For example, this can be a monthly, quarterly, or annual payment.
• One-time (or discretionary) contributions: In addition to scheduled contributions, you are free to make contributions in any amount you choose to your various investment vehicles.

And contrary to some common misconceptions, you are completely free to contribute whatever amounts you want to your life insurance policy. In other words, there is no cap on your savings. This lack of a limit offers a real advantage when managing your investments, as it gives you complete freedom.

In what situations do we talk about a coverage limit in life insurance?

While there is no cap on life insurance premiums, there are various limits to consider in terms of taxation, transfer, and insurance.

Stick to a limit of 150,000 euros to reduce your tax liability

As such, your life insurance policy is not subject to taxation. However, each surrender (withdrawal of funds) is subject to the single flat-rate withholding tax (PFU). Currently, this tax consists of: 

• 17.2% in social security contributions;
• a 12.8% income tax rate.

However, please note that the income tax rate depends on two factors: the length of time the contract has been in effect and the amount redeemed. 

Thus, to qualify for the most favorable tax treatment, the amount must not exceed 150,000 euros, and the payment must be made more than 8 years from now.

An exemption limit of €152,000 per beneficiary for the transfer of assets

As the designated beneficiary of a life insurance policy, you may inherit all or part of the deceased’s savings, depending on the terms set forth in the policy. But as you might expect, there are certain tax rules that must be followed. Specifically, the tax authorities provide for an exemption of 152,000 euros per beneficiary on the amount of premiums paid before the policyholder turned 70. This means that if, for example, you receive 100,000 euros, that amount is not subject to estate tax, since it does not exceed the established threshold.

If the amount exceeds this threshold of 152,000 euros, the tax authorities apply a flat tax rate: 

• 20% for any taxable portion of less than 700,000 euros;
• 31.5% on any taxable portion exceeding 700,000 euros.

A cap of 70,000 euros in the event of insurer default

To protect life insurance beneficiaries in the event of an insurer’s default, an organization called the Personal Insurance Guarantee Fund (FGAP) provides coverage for policyholders up to 70,000 euros. This means that if your total savings were estimated at 80,000 euros, then you would theoretically lose 10,000 euros.

Life Insurance Policy: A Closer Look at the Applicable Tax Rules

As mentioned earlier, both the dates of the payments and their amounts are taken into account when determining the tax rate on redemptions. By staying within the 150,000-euro limit and holding the investment for at least 8 years, you can significantly lower the applicable tax rate.

For more information, note that you may even be eligible for a significant tax deduction on the gains you earn. Specifically, if your taxable income for the year N-2 is less than €25,000 (€50,000 for jointly filed returns), then you are exempt from the flat-rate withholding tax, which is set at 7.5% or 12.8%, depending on the circumstances.

Similarly, you are entitled to an annual tax deduction of 4,600 euros (9,200 euros for jointly filed returns) on gains realized after holding the investment for 8 years.

Important strategies to know for optimizing the tax management of your savings and life insurance policy!

Life Insurance: An Ideal Solution for Facilitating Estate Planning

Renowned for being particularly advantageous in terms of asset transfer, life insurance allows the policyholder to transfer all or part of their estate to their designated beneficiaries under tax-favorable conditions upon their death. For example, the surviving spouse (whether married or in a civil union) is completely exempt from estate taxes. For other designated beneficiaries, a tax deduction is provided for by law. The amount of this deduction depends on the date of the relevant payments: 

• a deduction of 152,000 euros per beneficiary if the payments were made before the policyholder turned 70;
• A general deduction of 30,500 euros for all beneficiaries if the payments were made after the policyholder turned 70.

It should be noted that the remaining capital is then reintegrated into the estate’s assets. As a result, it is naturally subject to estate taxes at the progressive tax rate. 

A transmission that remains controlled

Although life insurance is a savings product with many benefits, its use can sometimes cause discord within families, particularly when it comes to the transfer of assets. Fortunately, there are safeguards in place to prevent abuse.

Protection of the Disadvantaged Heir

Under a life insurance policy, the policyholder is free to designate the beneficiaries of his or her choice. This means that the policyholder is entirely free to decide to bequeath the death benefit to only two of his or her three children. In practice, the disinherited heir may feel aggrieved. To prevent such injustices, the Civil Code provides for a legal action aimed at reducing the shares bequeathed to the other heirs: the action for reduction. The money recovered is then returned to the estate, which is then subject to the standard rules of estate taxes.

The Special Case of Clearly Excessive Premiums

In the interest of protection and social cohesion, the law provides for oversight of the transfer of capital. This includes what is known as the case of manifestly excessive premiums. In practice, the tax authorities verify that the transfer following the successor’s death does not present any significant irregularities. More specifically, they seek to uncover disguised attempts at tax evasion by taking into account, among other factors, the policyholder’s health, age, available savings, and standard of living at the time of the payments.

Typically, if an individual decides to open a life insurance policy into which they invest a significant amount of money, and the sole designated beneficiary is not a forced heir, the arrangement may seem suspicious and strongly resemble an attempt at a disguised transfer intended to circumvent inheritance taxes.