How does the purchase of life insurance work?
The subscriber of a life insurance contract can decide to buy back his capital at any time. Often subject to conditions, the purchase of life insurance can take different forms and has its own tax system. Explanations. HomeLife insuranceHow does the purchase of life insurance work? FULL BUY-BACK OR PARTIAL BUY-BACK? The buy-back of life insurance by the holder consists in withdrawing one or more sums of money paid before the end of the contract. It can be a partial or full buy-back. The surrender value of a contract corresponds to the amount recoverable after application of life insurance costs to an amount invested. A partial redemption : the subscriber withdraws part of the capital of his contract. A total redemption : the subscriber redeems all the capital of his contract. This action automatically leads to the termination of the contract. A life insurance buyback operation must be well thought out and consistent with the asset management strategy defined when the contract is opened. TWO CATEGORIES OF REDEMPTION Depending on the contract to which he has subscribed, the insured may have the choice between two redemption options: The redemption of free life insurance : the subscriber can re-buy it all or part at any time. The scheduled redemption of life insurance : this is necessarily partial redemptions on a specific timetable. TO KNOW According to the Insurance Code, the insurer is obliged to communicate the surrender value of the life insurance contract at the end of the eight years of subscription. This is the minimum value of the contract guaranteed by the insurer. HOW TO BUY BACK YOUR LIFE INSURANCE CONTRACT? Some contracts authorize the total surrender of a life insurance contract, others do not or only under certain conditions. However, all contracts offer the partial surrender of life insurance (Articles L. 132-21 et seq. Of the Insurance Code), provided that the contract has not been accepted by the designated beneficiary. To make a redemption request, there is a procedure to follow . The insured can choose one of the following two options: A registered letter addressed to the insurance company concerned. The subscriber must attach a copy of his identity document, a bank identity statement and the last annual statement of his life insurance contract. Make a redemption request online . Less formal, this method above all makes it possible to release funds more quickly. THE REDEMPTION CONDITIONS Before accepting the redemption request, the insurer must verify the use that the subscriber intends to make of the amounts redeemed. The reasons can be multiple: a need for liquidity, purchase of real estate, repayment of loan. Before carrying out a partial surrender of your life insurance, you must observe a few rules of caution: Check the conditions of withdrawal from the contract Arbitrate between a withdrawal from a euro fund or a unit-linked fund Calculate taxable interest BUY-BACK OF LIFE INSURANCE: WHAT TAXATION? Total or partial redemptions are subject to a taxation specific to life insurance, otherwise an often advantageous taxation. Indeed, after 8 years of holding a contract, the application of the annual deduction on earnings makes it possible to make withdrawals totally exempt from income tax. However, the subscriber will have to pay the social security contributions. Table of reductions on earnings on redemption of life insurance STATUS OF THE CONTRACT HOLDER AMOUNT OF THE ALLOWANCE single person € 4,600 married or civil partnership € 9,200 If the surrender of a life insurance contract is subject to taxation, only the gains are taxable. These tax rules should be taken into account before deciding to buy back a life insurance policy. Find out more about the reduction in life insurance HOW TO CALCULATE TAXABLE INTEREST? In the event of a partial withdrawal, you can ask your insurer to calculate the share of interest included in the withdrawal. Because this part will be taxable. You can also do this calculation yourself by applying the following formula : partial surrender amount - ((total payments made on surrender date x partial surrender amount) / total policy surrender value on surrender date) EXAMPLE You paid € 50,000 on your life insurance policy more than eight years ago. You want to make a withdrawal of € 20,000. The total surrender amount of your contract is € 70,000. To calculate the interest, you apply the formula: 20,000- (50,000 x 20,000) / 70,000) = 5,715. From this amount obtained, you must deduct the allowance, i.e. € 4,600 for a single person: 5,715 - 4,600 = € 1,115. The holder of this contract, if he makes the planned withdrawal, will be taxed on € 1,115. If he chooses the flat-rate withholding tax (PFL), he can calculate the sum to be paid: 7.5% x € 1115. LIFE INSURANCE SURRENDERS EXEMPT FROM INCOME TAX The law provides for a total exemption on the surrender of a life insurance contract, regardless of the duration of the contract, in the following cases: dismissal cessation of self-employed activity following a judgment of judicial liquidation early retirement 2nd or 3rd category disability To note These redemptions are however subject to social security contributions. LEARN MORE ABOUT LIFE INSURANCE The taxation of life insurance Life insurance and inheritance Life insurance in euro fund The beneficiary of life insurance The best life insurance comparator Frequently asked questions about life insurance The role of the life insurance broker Life insurance: which investments to choose in 2021? Should you take out life insurance after 70? 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