The basics of life insurance
Life insurance is a contract through which an insurer agrees, in exchange for premiums paid by the policyholder, to pay a sum of money to a designated beneficiary in the event of the insured’s survival or death. This financial product is often used as a long-term savings tool, for wealth transfer, and to protect loved ones in the event of death.
Life insurance contract
A life insurance contract is an agreement between the policyholder (the person who signs the contract and pays the premiums) and the insurer. The insured is the person on whom the risk of death or survival rests, and the beneficiary is the person designated to receive the benefits in the event the insured risk occurs.
The stakeholders
There are three main parties in a life insurance contract:
- Policyholder: The person who signs the contract, designates the beneficiary(ies), and pays the premiums.
- Insured: The person on whom the risk rests.
- Beneficiary: The person designated to receive the benefits.
The different types of life insurance contracts
Savings contracts
Savings contracts are the most common. They allow for the accumulation of capital that can be withdrawn at any time, either through partial withdrawals or at the end of the contract. These contracts are often multi-fund, offering the possibility to diversify investments between euro funds (guaranteed capital) and unit-linked funds (risk-based investment vehicles).
Eurocroissance contracts
Eurocroissance contracts are multi-fund contracts that offer capital guarantees at maturity, generally after 8 years. They allow for a higher potential return while maintaining a certain level of security for cautious investors.
Death benefit contracts
Death benefit contracts are designed to pay a lump sum or an annuity to beneficiaries in the event of the insured's death. They can be temporary (limited in time) or whole life (valid until the insured's death).
The taxation of life insurance
The taxation of life insurance varies depending on the duration of the contract, the dates of premium payments, and the type of contract. The capital gains generated by the contract are subject to different tax treatments depending on the contract’s age.
Taxation of capital gains
Capital gains realized on a life insurance contract are taxed based on the age of the contract. For contracts over 8 years old, an annual allowance is applied before taxation. Social contributions are also levied on capital gains at a rate of 17.2%.
Taxation of death benefits
In the event of the insured's death, the death benefits paid to beneficiaries are exempt from inheritance tax up to a certain amount, and then subject to a levy of 20% to 31.25% depending on the amount received.
The benefits of life insurance
Life insurance offers many benefits, including advantageous tax treatment, flexibility in managing savings, and a powerful tool for protecting loved ones in the event of death.
Wealth transfer
Life insurance allows for the transfer of capital outside of inheritance, which can be particularly advantageous for optimizing tax aspects and ensuring that funds are transferred according to the policyholder's wishes.
Flexibility and customization
The policyholder can freely choose the beneficiaries and modify the beneficiary clause at any time, except in the case of an accepting beneficiary. Additionally, the contract can be tailored to the saver’s needs, with the ability to choose different investment vehicles.
The risks and disadvantages of life insurance
Associated fees and costs
Like any financial product, life insurance involves fees, such as entry fees, management fees, and arbitration fees. These fees can vary significantly from one contract to another and impact the overall performance of the savings.
Investment risks
Unit-linked contracts expose the saver to market risks. The value of unit-linked funds can fluctuate depending on financial markets, potentially leading to capital losses.
Conclusion
Life insurance is a powerful tool for wealth management, offering a unique combination of protection, flexibility, and tax advantages. Whether you are looking to save for the long term, protect your loved ones, or pass on wealth, life insurance can effectively meet these needs.
