4.12. Life Insurance
Life insurance policies (assurance vie) in France provide a dual function.
In the first place, they can be a useful inheritance planning tool, because they offer tax advantages and greater freedom to dispose of your estate as you wish; the policies are also a useful longer-term savings vehicle, which can be used as part of your investment strategy.
- 4.12.1. Life Insurance for Inheritance
- 4.12.2. Life Insurance for Savings
4.12.1. Life Insurance for Inheritance
Life insurance policies are not liable to inheritance tax unless the amount received by the beneficiary exceeds €152,500, when a withholding tax becomes payable at the rate of 20%.
As the tax allowance applies to each beneficiary (not the total sum), it is possible to make provision for several family members. On this basis you could leave the best part of €500,000 to (say) your surviving spouse and two children, free of tax.
The capital sum payable out of an insurance policy up to the tax threshold is simply not taken into consideration in the global inheritance calculation.
In order to benefit from this exoneration, the insurance premiums in respect of the policy cannot be so large that they are considered excessive in relation to the lifestyle of the insured.
This condition is imposed in order to prevent insurance policies being opened near the end of a persons life, specifically to get around the entrenched rights of protected hiers. On the death of the insured, the latter would be able to make a legal challenge a policy if they considered it had this intent.
However, the courts have taken a liberal view of the size of the policies taken out, and many use this as an open window through which to circumvent the entrenched rights of inheritance.
Thus, in a recent case, a 91 year man took out a life insurance policy, making a premium payment of €23,000, with his nephew named as beneficiary in the event of his death. Within a month of taking out the policy, the man died. The nephew received the whole of the premium payment on the policy, without having to pay any inheritance tax. The nephew would otherwise have been liable for inheritance tax, at the rate of 55%.
Top Tip!
If you set up a life insurance policy before you become resident in France, and you are under the age of 70 years, then no inheritance or witholding taxes are payable, whatever the size of the payout on your death.
From the age of 70 years, any premimums above €30,500 to one or more beneficiaries, will form part of your estate for the purposes of calculating liability to inheritance tax. However, the sums generated by these premiums remain exempt, so it still remains a fiscally attractive investment.
Since the recent abolition of inheritance tax between married couples, and increased allowances for children, life insurance policies have ceased to be of such importance for the purposes of inheritance tax planning.
Nevertheless, as above, provided the premiums are not considered 'manifestly excessive' to the lifestyle of the insured, any sums paid out by a life insurance policy to a named beneficiary are not caught by the rule on the entrenched rights of protected hiers, leaving it possible for you to leave the full proceeds of the policy to whomever you wish.
Of course, if you are not married, then the policies also remain an important tool in inheritance planning.
Any proceeds of a life insurance policy that remain on the death of the surviving partner will be inherited by your children, or those next in line of inheritance.
Top Tip!
In order to reduce the potential tax liability on these inheriters it is possible to make a policy leaving the life interest to your spouse, but the reversionary interest to your children. On the death of your spouse, any remaining capital eventually received by your children escapes liability to tax. This type of policy is called démembrement de la clause bénéficiaire.
4.12.2. Life Insurance for Savings
Despite the undoubted advantages of life insurance for inheritance planning, the policies are as much a savings scheme as a method of providing for your loved one(s) on your death.
These policies offer three key savings advantages:
- A return that is normally higher than bank savings schemes
;
- A right to make withdrawls during the life of the policy
;
- Favourable tax treatment
.
During the term of the policy, if you make a withdrawl, then only the growth element of the withdrawl is taxed. The rest of the sum is available to you tax free. The rate of tax on withdrawls reduces the longer you have held the policy and, if held at least eight years, a couple could withdraw €9,200 each year, free of tax.
Accordingly, if you arrive in France with a lump sum to invest, you can take out a life insurance policy, and later make withdrawls to meet day to day requirements, with only the growth element of the withdrawls subject to tax, as well as the social welfare levy.
Top Tip!
Even if you adopt a French marriage contract, you should consider taking out life insurance as part of your investment strategy.
As always with any investment, you need to do your research and get good advice. Be careful, in particular, of management charges and charges for withdrawls.
We will provide more information about assurance vie in due course.
Next: Inheritance Laws & Taxation in France Index
Finance & Taxation