Taxation of life insurance: three scenarios for the post-election period

Life insurance is an essential tool for anyone who wants to organize their estate as they see fit and pass on capital at a lower cost. Its legal and tax regime could however harden after the presidential election of 2022.

Life insurance makes it possible to transmit capital to the people of your choice while escaping the civil and tax rules applicable to inheritance.

However, several experts are campaigning for a review of these rules, and it is not excluded that the next President of the Republic will follow all or part of their recommendations. Focus on possible scenarios.

Maintaining the status quo

On the death of an insured, the capital constituted in his life insurance is transmitted to the beneficiary(ies) he has designated outside the estate. This means that he is not taken into account to assess the assets to be shared between his heirs and the share of his assets which must go to his compulsory heirs (children or surviving spouse). This capital is not subject to inheritance tax either, but to a levy of 20% or 31.25%, after a deduction of 152,500 euros per beneficiary.

These specificities can allow you to transmit to your heirs a share of inheritance greater than that provided for by law or to gratify a third party who is not one of your heirs in more generous proportions than with a will. All within a very advantageous tax framework.

Likelihood of this scenario: weak. It is unlikely that this regime will continue in 2022 because it constitutes both a stroke of the penknife aimed at the founding principles of inheritance devolution and a roundabout way of escaping inheritance tax. Defects which constitute a big shortfall for the coffers of the State!

Alignment with common law

A report submitted to the Ministry of Justice in 2019 recommends aligning the legal regime of the death benefit of life insurance with that of property transmitted by inheritance. In other words, to integrate this capital into the estate of the insured, and to take it into account to calculate the “hereditary reserve” that the law grants to his privileged heirs.

Two other reports from 2018 and 2021 also recommend subjecting the entire death benefit to inheritance tax, without deduction. That is to say, to apply the tariff of rights corresponding to the family relationship existing between the insured and each beneficiary.

Likelihood of this scenario: nothing. This complete alignment with inheritance law seems even less likely than the previous scenario, as it would significantly limit the possibilities of passing on part of one’s assets to the people of one’s choice. In addition, life insurance would lose all tax interest, which could call into question its very existence.

Convergence with common law

A middle way could be chosen. The next parliamentary majority could, for example, decide to maintain the civil benefits attached to the death benefit while trimming its tax benefits.

The allowance of 152,500 euros granted to each beneficiary would then be retained, but the excess part of the capital received would be subject to inheritance tax and no longer to a flat-rate levy.

Likelihood of this scenario: High. This reform would at least make it possible to preserve the asset interest of life insurance while increasing the tax revenues of the State. Insured persons would thus always be free to gratify whomever they wish, without the risk of their wishes being called into question upon their death. And the public authorities would have additional resources to balance our public accounts.

Decisions to be made without delay

If you plan to fund your life insurance contracts, do so without delay. Only payments made from the day of the reform would be affected by the tightening of taxation in the most favorable scenario.

Olivier Puren

Leave a Comment