What is the taxation of life insurance surrenders?

Savings product that broke its deposit record last year, life insurance is often prized by the French for its advantageous taxation and its availability. Indeed, the repurchase of a life insurance is possible at any time of the contract. On the other hand, its taxation depends in particular on the moment of the redemption, and on whether the redemption is partial (withdrawal of part of the money before maturity) or total (withdrawal of the entire sum terminating the contract).

Taxes to be paid on the interest withdrawn only

One of the main principles of life insurance taxation is that all sums paid by the contract holder, also called premiums, are exempt from tax. Indeed, only the interest generated (also called gains or products) is taxable, and only when it is withdrawn. Interest already earned but left on the life insurance is not reportable. Thus, as long as the saver makes no redemption on his life insurance, he has nothing to enter on his tax return.

Life insurance can accommodate two main types of investment: funds in euros at the guaranteed rate and more volatile units of account (shares in mutual funds, SCPI shares, etc.). There is no difference between the tax system of these two major investment families. On the other hand, in addition to giving a bonus to the seniority of the contract to encourage its conservation (annual allowances of 4,600 euros for a person and 9,200 euros for a couple are provided for redemptions made on contracts of more than 8 years ), the taxation of redemptions of life insurance distinguishes whether the redemption is partial or total.

A different tax base depending on the type of redemption

The taxation of life insurance redemptions differs according to the type of redemption made. For a total redemption, taxation is based on the gains made, i.e. on the difference between the total value of the contract at its term and the payments made to it throughout the life of the contract.

With regard to partial redemptions, the taxation is not made directly on the amount recovered, but on a taxable basis calculated on the basis of the withdrawal made, the premium payments already made, and the total value of the contract ( i.e. premiums paid + interest already generated). The calculation formula to find its tax base is as follows: Surrender amount — (Total premiums x Surrender amount / Contract value). Thus, for a saver who wishes to withdraw 5,000 euros from his life insurance contract worth 20,000 euros and where he has already paid 15,000 euros, the tax base will be 1,250 euros: 5,000 — (15,000 x 5,000 / 20,000 ).

Taxation of life insurance surrenders and exemptions

Whether it is a partial or total redemption, redemptions of life insurance are always subject to social security contributions (rate of 17.2%). All are in principle also subject to income tax. This taxation is normally done according to the marginal tax rate (TMI) of the insured, but the latter can also ask to be taxed according to the flat-rate levy in discharge (PFL) or the single flat-rate levy (PFU). These two tax options are only available for certain seniorities and certain contract amounts, two criteria which can also have an impact on the tax rate. For example, when the payments have been made since 26-9-2017, contracts older than 8 years with a value less than or equal to 150,000 euros are taxable at the TMI of the contract holder, or at a PFL of 7, 5% (optional). Those with a value greater than 150,000 euros are taxable at the TMI, or at a PFU of 12.8% for the part of the contract greater than this sum (the rate of 7.5% remains applied up to 150,000 euros). So, in addition to understanding the taxation of redemptions, it is also important to know how to optimize your taxes on life insurance withdrawals.

You should also know that it is possible not to have to pay any tax on a withdrawal. Indeed, a partial redemption or a total redemption can be exempt from tax, and for the same special cases (following a dismissal, early retirement, disability or judicial liquidation). The tax exemption can be granted, regardless of whether these scenarios occur to the contract holder, or to his or her spouse or PACS partner. The purchase of a principal residence, on the other hand, does not make it possible to obtain a tax exemption, whereas it is a case provided for the release of a PER.

(By the editorial staff of the hREF agency)

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