withdraw before or after December 31st, why has everything changed?

You opened your life insurance more than 8 years ago? You benefit from the most favorable taxation! However, provided that you do not withdraw too much money at once, especially if you have large contracts where you have accumulated significant financial gains. Explanations.

Do you have a life insurance policy for several decades where capital gains are automatically accumulated? Or newer life insurance, opened for e.g. 10 years ago, but with large amounts? In both cases, your capital gains may exceed tax deduction applies to one life insurance over 8 years.

4600 or 9200 euros in tax relief each year

The famous 8-year retention cap allows you to take advantage of pre-tax deductions for any withdrawal (or redemption in life insurance jargon). The allowance reaches 4,600 euros for a single person and 9,200 euros for a joint tax couple. Important clarification: the amounts mentioned do not apply to the amount of the buyback, but only the share of capital gains included in this redemption. The capital gain (financial gains) corresponds very precisely to the difference between the payments made on the contract and the value of the contract on the date of surrender, in relation to the redemption amount.

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What tax for what exceeds?

If the amount of capital gains exceeds the reduction threshold, three possible scenarios: integration in the income tax scale, fixed deduction (PFL) of 7.5% or more rarely flat tax 12, 8%. This last possibility concerns only a handful of savers: those who have large contracts (more than 150,000 euros of savings deposited on life insurance) and who have deposited money on them since the entry into force of the reform’s fixed tax (end of September 2017 for life insurance deposits).

Life insurance: why the taxation of your earnings has been so advantageous since 2022

therefore the special case of large contracts to focus on the other two options, bar or PFL. The first: you choose to be taxed according to the progressive scale, the same as income from work (slices of 11% to 45% depending on the household). Second option: you choose the fixed withholding tax (PFL) of 7.5% (1).

To summarize: if you exceed the reduction limits, you pay (a little or a lot) income tax on the excess.

Taxation of life insurance: full details of the rules in case of cancellation

Two redemptions one month apart

Do the realized capital gains on your life insurance contract(s) exceed these thresholds and do you now anticipate a need for cash in 2022? Maybe we should take advantage of the end of the year take advantage of the tax advantage in two stagesbecause the allowance is valid every year.

Example. A couple currently has two life insurance policies, where each partner has a contract in their name, for 30,000 euros, for a total of 60,000 euros: an amount they plan to spend in 2023. These partners signed their contracts at the same time, here is exactly 8 years, each with a payment of 22,500 euros. In short, out of their 60,000 euros, they have 45,000 euros in capital and 15,000 euros in capital gains.

If they withdraw everything at once, they pay several hundred euros in income tax (435 euros with PFL). If they withdraw a first half at the end of 2022 and another about a month later, at the beginning of 2023, the share of capital gains will be 7,500 euros in 2022 (2)for a slightly higher amount in 2023 due to the additional capital gains made in 2022. In this case, thanks to their annual allowance of 9200 euros, they will not pay tax on their capital gains either in 2022 or in 2023.

Be careful though partial redemption periods! The statutory period for the insurance company is 2 months. In fact, most often a partial withdrawal is made in a week, at worst 10 days, but it is better to check with your managing general agent or financial advisor. In short: make the withdrawal in 2022 without waiting to avoid a bad surprise.

Tax exemption: this blunder that can cost you dearly at the end of the year

Over several years: reduce the share of capital gains

Do the amounts on your life insurance far exceed the amounts mentioned? This logic of annual redemptions also applies to contracts with much larger outstandings, by staggering your withdrawals over several years to clean your winnings.

It remains to be seen how to use the withdrawn amounts during the first redemptions. You can either place them on a new life insurance contract, possibly more efficient, or even use them to make a payment on the same contract, which amounts to laundering those capital gains. Nothing illegal, no worries! Ultimately, by holding the same contract, it will always have the same value (2) but with a lower share of capital gains, therefore potentially less taxable in the future.

Life Insurance Surrender Calculators (Taxation, Scheduled Withdrawals, etc.)

(1) In the case of the 7.5% exemption option, the taxpayer no longer benefits from a refund, but from a corresponding tax deduction of a maximum of 345 euros (i.e. 4600 euros at 7.5%) for a single person or 690 euros for a couple (ie 9200 euros 7.5%).

PCS. 2. Redemptions are imposed on the applicable social contributions on the basis of the capital gains presented at the time of redemption, and after correction of the social contributions already paid over time.

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