Life Insurance: Grow and Pass On Your Assets with Raizers
Life insurance policies are a popular savings product among French households. Depending on your risk tolerance, they can offer higher or lower returns. They also have the major advantage of simplifying the transfer of funds in the event of the policyholder’s death. Here’s what you need to know about life insurance:
Life insurance policies are offered by insurers;
It is a medium- or long-term savings product (it is generally recommended that you let your money grow for at least 8 years, particularly for tax reasons);
Its return varies depending on the investment vehicle and the level of risk assumed;
You can choose between self-directed or managed investing through a management mandate;
It offers a fairly favorable tax regime, particularly with regard to the transfer of capital.
What is a life insurance policy?
A life insurance policy takes the form of a medium- or long-term savings product. It is a financial investment designed to grow the money invested. The policy’s return—that is, the capital gain realized—depends primarily on the level of risk assumed and the investment vehicles used.
Unlike other savings products, such as the Livret A or the LDDS (sustainable and solidarity savings account), a life insurance policy has a unique feature. As its name suggests, it makes it easier to pass on your accumulated savings to your loved ones in the event of your death, which makes it a particularly popular and useful product.
Good to Know
A life insurance policy should not be confused with term life insurance. The latter is a type of insurance policy in which the death benefit is intended exclusively for the beneficiaries named by the policyholder.
How does a life insurance policy work?
In practical terms, a life insurance policy works based on a simple mechanism:
You deposit money through what are called contributions (or premiums);
The insurer invests your money in the financial vehicle(s) you have chosen;
You can withdraw a portion of your accumulated savings through a partial surrender or the entire amount through a total surrender (in which case the life insurance policy is permanently closed).
Good to Know
Interest on your savings is subject to tax when you withdraw funds. The tax treatment depends primarily on how long the policy has been in effect and the dates on which premiums were paid.
Where are the funds invested in a life insurance policy?
There are three types of investment vehicles in life insurance.
The Euro Fund
This is the safest investment option. It is chosen by investors who prioritize safety over returns. As the name suggests, the funds are denominated in euros and consist of financial assets with very low risk. The rate of return is generally set in advance, which provides greater clarity for investors.
This solution has a major advantage: the insurer guarantees the principal. In other words, you simply cannot lose money by choosing this investment vehicle.
Units of Account (UA)
This investment vehicle is intended for investors whose primary goal is to diversify their investments and seek higher potential returns. In practical terms, unit-linked investments take various forms. These may include, for example, stocks, shares in SCPIs (real estate investment trusts) or UCITS (undertakings for collective investment in transferable securities), corporate bonds, or structured products.
Since stock and real estate markets are inherently volatile, investing in unit-linked products generally carries a higher risk of capital loss. However, the potential return is also higher. Keep in mind, though, that not all unit-linked products are synonymous with high returns and a high risk appetite, and that some investments are designed to deliver lower but more reliable returns over the long term.
Good to Know
It is entirely possible to transfer all or part of your savings from one investment vehicle to another during the term of the contract: this is known as portfolio rebalancing. It allows you to adjust your investment strategy based on current economic conditions and major market trends, which is why it can be extremely useful!
The Euro-Growth Fund
The Euro-Growth fund is, in a sense, an investment vehicle that falls somewhere between euro funds and unit-linked funds. It offers the advantage of a capital guarantee, but this guarantee applies only to a minimum investment horizon of 8 years. The financial assets it targets are more diversified than those of a traditional euro fund, and therefore involve a higher risk appetite. In return, the potential return is higher.
Good to Know
If you choose a single investment vehicle, it’s called a single-vehicle policy. On the other hand, if you decide, for example, to invest in a euro fund and unit-linked products, it’s called a multi-vehicle policy. This type of policy offers the advantage of diversifying and better spreading out risks to balance your investments.
Life Insurance Management: How to Choose Between Self-Directed and Managed Accounts?
If you purchase a life insurance policy, you’ll have a choice between two management options.
Open Management
The distinctive feature of the self-directed management option isthe absence of a management mandate. This means that the responsibility for choosing investments rests entirely with the policyholder. The policyholder decides which investment funds to use to grow their savings. However, please note that Raizers offers model asset allocation recommendations. This is a valuable resource to help you better manage your savings and investments if you’re new to the subject. It’s a good compromise for savers who want to maintain a degree of independence while still receiving advice from professionals!
Steered Management
In contrast, managed investing involves signing a management agreement. Simply put, the distributor (or insurer) is responsible for making your money work by selecting various investment funds on your behalf. In most cases, the distributor entrusts this management to a specialized team, such as wealth managers.
Note: At Raizers, the recommended managed investment service is provided by Generali Wealth Solutions. For any inquiries, please contact customer service.
A Closer Look at Investment Profiles
It should be noted that investors can choose from various investment strategies, depending on their risk tolerance. To this end, there are generally three main types of investment profiles:
the conservative profile, which seeks above all to limit risk by focusing on the safest investments, albeit those with lower returns;
the balanced profile, which lies halfway between safety and risk-taking;
the dynamic profile, which focuses primarily on investments with high return potential but, in practice, carries a higher risk of capital loss.
What are the various fees associated with a life insurance policy?
Various fees may apply under your life insurance policy:
Application fees: Application fees are fixed costs specified by the insurer when the policy is issued. As the name suggests, they are intended to cover the costs associated with processing your application and reviewing your profile.
Contribution fees (or entry fees): When you make a contribution (deposit money into the policy), the insurer charges a fee. The amount generally depends on the premium amount, but it may also be a fixed amount that remains the same for each premium paid (lump sum).
Management fees: These essentially represent the compensation paid to the insurer and the distributor. Management fees are set in advance and deducted throughout the term of the life insurance policy.
Arbitrage Fees: If you decide to perform an arbitrage (transfer all or part of your savings to a new investment vehicle), the insurer will charge a fee to cover the transaction. Like deposit fees, these fees may be proportional to the amounts transferred or fixed, in the case of a flat-rate structure.
What tax rules apply to life insurance policies?
The first thing to note regarding the taxation of life insurance policies is that only the gains (interest and capital gains) are taxable. Similarly, they are exempt from income tax as long as you do not make a withdrawal (partial or total surrender).
The amount of tax owed on a life insurance policy depends on three major factors: the length of time the policy has been held, the date the premiums were paid, and the amount of the premiums.
Premiums paid before September 27, 2017
Policyholders who hold a life insurance policy into which premiums were paid prior to September 27, 2017, are subject to a special tax treatment. In the event of a partial or total surrender, the gains are taxed as follows:
application of social security contributions (17.2%);
application of the progressive income tax scale OR the flat-rate withholding tax (PFL) at a rate of 7.5%.
Premiums paid after September 27, 2017
If you decide to purchase a life insurance policy today, the tax treatment is slightly different. This is because it is based on what is known as the single flat-rate levy (PFU), which always consists of social security contributions (17.2%) as well as a non-final flat-rate levy (12.8% or 7.5%), the rate of which varies depending on the amount of the premiums and the age of the policy.
To help you understand this better, you can refer to the table below:
The tax deduction
You may be eligible for a tax deduction on gains from your life insurance policy under certain conditions.
First, note that you can opt out of the flat-rate withholding tax if your taxable income for the year N-2 is less than 25,000 euros or 50,000 euros in the case of joint filing.
In addition, you are automatically entitled to an annual deduction of 4,600 euros (9,200 euros for joint filers) on your gains from various policy redemptions after holding the life insurance policy for 8 years .
Wealth Transfer: What Are the Benefits of a Life Insurance Policy?
One of the main advantages of a life insurance policy is that it allows the policyholder to pass on their estate . Specifically, it enables:
a complete exemption from inheritance taxes if the designated beneficiaries of the policy are the surviving spouse, the civil union partner, or siblings (under certain conditions);
to receive a substantial tax deduction for any other beneficiary.
Tax deduction for payments made before the policyholder turns 70
If premiums were paid before the policyholder turned 70, then the tax exemption per beneficiary is set at 152,000 euros. This means that a parent wishing to distribute their estate equally among their three children can, in theory, avoid taxation if the total value of their life insurance policy does not exceed 456,000 euros.
If the expected share per beneficiary exceeds 152,000 euros, then a flat tax rate applies. This rate is set at:
20% for the bracket between 152,000 and 700,000 euros;
31.5% for the bracket above 700,000.
Tax deduction applicable to payments made after the policyholder turns 70
There is a specific rule regarding premiums paid after the policyholder turns 70. In this case, these premiums are subject to inheritance tax, after a tax exemption of approximately 30,500 euros.
Good to Know
Inheritance taxes vary depending on the degree of kinship between the policyholder and the beneficiaries.
Why should you purchase life insurance?
Taking out a life insurance policy offers several benefits. First, it allows you to build up a contingency fund. Contrary to popular belief, you can certainly withdraw money from your policy whenever you choose. Having savings that you can access at any time is a significant advantage when it comes to dealing with life’s unexpected events or financing various projects, such as buying a home.
Another major advantage of a life insurance policy is how easy it is to transfer the proceeds to your designated beneficiaries. You may be completely exempt from estate taxes or benefit from substantial tax allowances, which greatly simplifies the management and transfer of your estate.