Did you know that life insurance is tax-advantageous?
In this article, we will discuss this advantageous tool in terms of taxation, inheritance, and investment, and how to use it effectively.
1. What is Life Insurance?
Life insurance is a savings contract taken out with an insurer, allowing you to grow capital while benefiting from certain tax advantages.
2. What is the Purpose of Life Insurance?
Life insurance can help achieve several objectives:
- Build wealth.
- Grow capital.
- Prepare for retirement.
- Save for a real estate project.
- Prepare for the future of your children or grandchildren.
This insurance contract, accessible to all, allows you to set aside money without constraints. It can be funded at any time, and there is no obligation to make payments. In other words, once you have taken out a life insurance policy, you are free to make further transfers or not.
Note: Life insurance is not just for adults! It can also be taken out in the name of a minor child.
3. A Favorable Tax Framework
Life insurance benefits from advantageous taxation, both in France and Germany, although the rules differ between the two countries.
As a German tax resident, life insurance gains are subject to capital gains tax (Abgeltungsteuer) at a rate of 25%, to which social surcharges (Solidaritätszuschlag and Kirchensteuer, if applicable) are added. However, German taxation applies only to the portion of gains and interest generated by the investment.
After returning to France and as a French tax resident, your German life insurance contract will benefit from French tax advantages. Gains after 8 years benefit from an annual allowance of €4,600 (for a single person) or €9,200 (for a couple), and a reduced tax rate (7.5% after an allowance for realized gains).
If you are a tax resident in Germany, it is important to declare your French life insurance contract to avoid the risks of double taxation.
As Germany and France have a tax treaty, you can benefit from a tax credit in one country to avoid being taxed twice.
Click on this link to learn more: Avoiding Double Taxation Between France and Germany: Key Strategies.
4. Wealth Transfer
Life insurance is also an excellent way to transfer wealth. This contract allows you to designate beneficiaries who will receive the capital outside of the estate.
- In France: In the event of the policyholder’s death, a favorable tax regime applies, with exemptions or allowances that vary depending on the policyholder’s age and the amounts of premiums paid. Payments made before age 70 benefit from an allowance of €152,500 per beneficiary.
- In Germany: If you designate beneficiaries under your life insurance contract, they will receive the capital directly. Depending on the degree of kinship and exemption thresholds, inheritance taxes may vary.
5. Financial Investment
Life insurance remains a flexible and attractive product for investment, with the possibility of choosing different types of investment vehicles:
- Euro-denominated funds: Offer maximum security, as they guarantee the capital, but returns are low.
- Unit-linked funds (equity funds, bonds, real estate, etc.): Returns are potentially higher, but with a risk of capital loss. This is an option to diversify your investments in international financial markets.
6. How to Use Life Insurance Effectively?
- Anticipate Taxation: It may be wise to close your life insurance contract in France to benefit from allowances before changing tax residency. However, it is important to stay informed about German and French tax obligations to avoid double taxation.
- Optimize Wealth Transfer: Carefully choose your beneficiaries. In France, designating multiple beneficiaries allows for maximizing tax exemptions.
- Diversify Your Investments: Use life insurance to diversify your investments by taking advantage of the various investment vehicles offered. You can adjust your choices according to your short-term or long-term objectives.
- Consider Portability: All else being equal, your German contract benefits from the same portability.
Conclusion
Life insurance is an excellent tool for preparing for retirement, transferring wealth, or optimizing savings. Properly managing taxation between the two countries and adapting the contract to your needs is essential to maximize its benefits.
Schedule an appointment with our financial advisors to receive personalized support.