Life Insurance: After 8 Years What Happens?

Life Insurance: After 8 Years What Happens?

Have you ever heard it said or repeated “life insurance is good but it’s blocked for 8 years”?

The fateful date of 8 years is often likened to the release of funds on a life insurance contract. It is, however, FALSE. Life insurance is an investment that benefits from liquidity at all times. It means the money is available. Policyholders can withdraw the money held on their life insurance at any time and not just after 8 years.

Some preconceived ideas still persist about life insurance for more than 8 years

6 Received Ideas Deciphered

Can I make withdrawals on my life insurance before 8 years?

YES – You can make a partial or total redemption (withdrawal) at any time. You can withdraw your money from your life insurance before and after 8 years.

Your money is always available. Redemption is possible at any time even from the 1st year. So don’t keep in mind that your money is blocked!

But then, why is this adage so anchored in the minds of savers? The reason: taxation. The longer you leave your money (over 8 years), the lower the capital gains tax will be. The constraint of taxation after 8 years has been distorted into a kind of blocking of funds before the fateful anniversary date.

In addition, more savers are using life insurance as short-term savings accounts. With a return on the fund in euros much higher than other short-term investments (passbook A, term account, LDD, etc.), the life insurance contract has become an essential part of a short-term or medium-term asset strategy.

The introduction of the flat tax (or single flat-rate levy) gives better visibility on the taxation of life insurance in the event of withdrawal and reinforces the use of the contract as a short-term savings account.

In case of temporary liquidity need, you are not obliged to make a withdrawal. The insurer can advance you the money while leaving your money on the contract. This is called an advance. Talk to your wealth management advisor;

Can I make payments on my life insurance after 8 years?

YES – You can continue to make payments on your life insurance after 8 years.

Once the 8-year anniversary date of the contract has been reached, all new payments will benefit from reduced taxation.

Is taxation more advantageous for withdrawals on a contract of more than 8 years?

YES – The taxation applicable to contracts of more than 8 years is lighter than contracts of less than 8 years.

For contracts and payments made before 09/27/2017, your interest is subject either to the progressive scale of income tax or, if it is more interesting, to the flat rate withholding tax, the rate of which varies according to the age of the contract.

  • From 0 to 4 years old: 35%
  • From 4 to 8 years old: 15%
  • Over 8 years: 7.5%

For contracts and payments made after 27/09/2017, your interest is subject to a flat tax whose rate is different depending on the anteriority of the contract

  • From 0 to 8 years old: 12.8%
  • Beyond 8 years: 7.5% (and 12.8% for outstanding amounts over €150,000)

The tax option at the progressive scale of income tax is always possible but is only interesting for non-taxable taxpayers.

In addition to reduced taxation after 8 years, the subscriber benefits from an allowance on earnings of €4,600 for a single person and €9,200 for a couple.

Social security contributions at the rate of 17.2% are also due during a partial redemption or a total redemption on the part of the gains (and not on the capital).

Does the taxation of life insurance depend on the date of the payments?

NO – The taxation applicable to your redemptions or withdrawals depends on the opening date of the life insurance contract. The date of the payments on the contract does not matter. Hence the need to take the date as soon as possible even by making a low initial payment. 

For example, if you open a contract with an initial payment of €1,000. Then after 7 years, you make an additional payment of €100,000. After 8 years, at the time of redemption, all the amounts will benefit from the advantageous taxation of contracts over 8 years old, regardless of the date of the payments.

Do I have to close my life insurance after 8 years?

NO – You can keep your life insurance contract as long as you wish. You are not forced to make total redemption.

Life insurance is not only an ideal investment tool after 8 years but also a transmission envelope with reduced or even zero taxation on death capital. You can transfer the sum of €152,500 tax-free after your death to the people of your choice.

During a total or partial surrender, you can either use the insurer’s standard form or write a letter on plain paper. However, before withdrawing money, we recommend that you carry out a redemption simulation. This calculation will give you a clear and precise vision of the tax rate and if you have a wealth management consultant, he can use these figures to help you reduce your tax by taking into account the allowances after 8 years.

Is the total amount of the withdrawal taxable?

NO  – Another preconceived idea should be debunked. Contrary to what one might think, taxation does not apply to the entire redemption but only to the part representing the interest. Its interests correspond to the added value of your contract. 

Example: Your contract is worth €120,000. It is made up of €100,000 of capital and €20,000 of capital gains (or gains).
If you buy back €50,000. Taxation will only apply to €50,000 – (€100,000 x €50,000) / €120,000. The capital gain corresponding to a purchase of €50,000 amounts to €8,333. 

If the contract is more than 8 years old in 2018 and the couple is married, the taxation due will only relate to social security contributions of 17.2% x €8,333 = €1,433. 

As the amount of the capital gain is less than the abatement of €9,200, no tax is payable.

Stanley Cole

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