A capitalization contract is a financial investment that allows you to grow your savings. Although it is less well known than life insurance—with which it shares several similarities—it offers specific advantages.
- It is available to individuals and legal entities, with no age limit.
- Available in various forms and with a range of options, it can be tailored to your wealth management strategy and financial goals (single-asset or multi-asset plans, one-time or regular contributions, self-directed or managed accounts, etc.).
- Unlike life insurance, it can be transferred during your lifetime through a gift or retained by your heirs after your death.
- Only the earnings generated are taxed, at rates that vary depending on the age of the policy.
- After eight years, you are eligible for a tax deduction if you make a withdrawal.
Capitalization Contract: Definition, Characteristics, and How It Works
What is a capitalization contract? A capitalization contract is a type of savings product, just like life insurance. It allows you to invest capital that will earn interest and gradually increase the initial amount.
The return on the investment depends on the plan you choose (single-asset or multi-asset) and the management fees charged by the insurer or specialized firm with which you purchase the policy.
Who is it for? The capitalization contract is available to everyone, with no age limit. It can be purchased by individuals or legal entities (such as associations, companies, etc.).
How does it work? This investment works similarly to life insurance. It allows you to invest money with the goal of growing your savings—funds that you can withdraw at any time through a withdrawal or surrender. A capitalization contract allows you to invest in a wide range of financial instruments:
- euro-denominated funds through a single-fund contract;
- unit-linked products and euro-denominated funds, through a multi-product contract, for which you can choose the asset allocation.
When you sign up, you choose the type and frequency of payments (one-time initial payment, flexible payments, scheduled payments) and a management style (self-directed or managed).
The Advantages and Disadvantages of a Capitalization Contract
Benefits:
- Choose a plan that suits your profile by investing in a variety of assets.
- Transfer your savings during your lifetime through a gift, either as full ownership or as a split ownership arrangement.
- Savings are available at any time through partial or full withdrawals (with favorable tax treatment after 8 years).
Disadvantages:
- Unlike life insurance, it is not possible to designate a beneficiary.
- The invested capital is subject to estate tax.
- Higher tax rate on gains realized before the 8-year mark (12.8% instead of 7.5%).
- Less widely marketed and less common than life insurance.
Benefits and Risks of a Capitalization Contract
What are the differences between a capitalization contract and life insurance?
Capitalization contracts and life insurance are two savings products that are quite similar in terms of how they work and their purpose, but differ in their approach to wealth management.
A capitalization contract is not tied to the policyholder’s lifetime. The policyholder may decide to transfer it by gift during his or her lifetime. Since the principal is included in the estate’s assets, it is transferred to the heirs in accordance with general law. It is not possible to designate one or more beneficiaries. The heirs may decide to retain the capitalization contract. In that case, they retain its tax seniority.
A life insurance policy, on the other hand, terminates upon the policyholder's death. The death benefit is paid to the designated beneficiaries according to the chosen distribution. It is not included in the estate's assets.
Differences Between Capitalization Contracts and Life Insurance
How are capitalization contracts taxed?
These investments are subject to the same tax treatment as life insurance. Only the returns generated (interest and capital gains) are taxed, not the principal. They are subject to a single flat-rate withholding tax (PFU) of 30%, which includes:
- a flat-rate withholding tax (not in lieu of tax) of 12.8% (if the contract is less than eight years old) or 7.5% (if it has been in effect for more than eight years and the funds paid in are less than €150,000);
- social security contributions of 17.2%.
Tax Treatment Based on the Age of the Capitalization Contract
What are the tax benefits of a capitalization contract?
Transfer by gift: You may choose to transfer a capitalization contract to your heirs during your lifetime by way of a gift. In this case, you are eligible for the standard tax exemptions, meaning that each parent may gift up to €100,000 per child every 15 years without paying any gift tax.
Tax deduction: After the contract has been in effect for eight years, you are entitled to an annual deduction of €4,600 for a single person or €9,200 for a married couple or civil union partners filing a joint tax return, on any gains, if you make a withdrawal.