The proceeds generated by your life insurance contract are subject to social security contributions. When they are taxed depends on the type of investment fund in which you have placed your assets. Explanations.
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Often presented as a “tax envelope”, life insurance allows you to grow your savings with little or no tax. The gains generated within it are indeed tax-exempt as long as they are reinvested, and in the event of withdrawal, they are taxed at a rate that is all the lower as your contract is old. Better, after 8 years, you can recover up to €4,600 in earnings each year (€9,200 if you are married or in a civil partnership) tax-free. And if you are the holder of an old contract taken out before 1998, you can benefit from a total exemption from tax on certain earnings. But these advantageous rules only concern income tax, no social security contributions. These are due on all gains generated by your life insurance, including those that are tax-exempt, as long as you are domiciled in France for tax purposes.
Three charging methods
The gains generated by your life insurance are subject to social security contributions under different conditions depending on the funds from which they come:
- Interest generated by funds in euros with guaranteed capital is taxed each year when they are entered into an account.
- The products generated by unit-linked funds with non-guaranteed capital are taxed in the event of partial or total withdrawal (or redemption) made on the contract.
- Income generated by euro-croissance funds is taxed when the guarantee offered by these funds is reached, ie at the end of their eighth year of ownership.
- The products of the various funds not subject to social security contributions during your lifetime will be taxed on your death. The insurer will deduct them from the capital to be paid to the beneficiaries designated in your contract.
This difference in treatment is obviously to the advantage of unit-linked funds and euro-growth funds because the products they generate each year are fully reinvested to become productive in turn. On the contrary, the annual interest generated by the funds in euros is only partially capitalised.
Good to know. The taxation of interest on funds in euros over time can result in you having to pay more social security contributions than you owe, if your contract is globally at a loss due to poor performance recorded by unit-linked funds in which you have invested. In this case, at the end of your life insurance or at your death, the insurer will have to pay back into the contract the levies paid in excess.
Three different taxes
Social security contributions on life insurance earnings are broken down into three separate taxes:
- the CSG (generalized social contribution) at the rate of 9.2%;
- the CRDS (contribution to the repayment of the social debt) at the rate of 0.5%;
- and the solidarity levy at the rate of 7.5%.
That is an overall tax rate of 17.2%. However, you are exempt from CSG and CRDS if you reside in France but are covered by a social security scheme within the EEA (EU, Iceland, Norway, Liechtenstein) or Switzerland, and are not covered by a mandatory French social security scheme (because you are a cross-border worker, for example). In this case, you are only liable for the solidarity levy of 7.5% on your life insurance earnings.
Also remember that the CSG deducted from your non-tax-exempt earnings is deductible from your other taxable income up to 6.8%, if you waive the flat tax and submit them to the progressive tax scale. But this partial deductibility is fiscally advantageous only if you are taxable in the first bracket of the tax scale, taxed at 11%. If you are taxable in the 30% or more bracket, on the other hand, it is not because the tax savings induced by the deduction of the CSG are lower than the additional tax to be paid in the event of waiver of the flat tax.
Good to know. The rate applicable to your life insurance earnings is that in effect on the date they are withdrawn by the insurer. The so-called “historical rate” rule, which allowed you to tax your winnings at the rate in effect when they were acquired, now only applies in very exceptional circumstances.
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