No, the money put into your life insurance is not blocked! You can tap it whenever you want by making the so -called a partial redemption. You recover part of your savings, but your contract continues to exist and generates interest on the remaining capital. Are you hesitant for fear of paying taxes? Do not worry! First, you can withdraw absolutely tax-free. Then, when it applies, taxation is relatively limited.
1 – Prioritize your old life insurance policies
If you hold an old contract life insurance, interest generated by amounts invested prior to January 1, 1998 is completely excluded from income tax.
2- Do your calculations and make the most of the tax allowance
For payments made after and until September 27, 2017, taxation is reduced in case of withdrawal for at least 8 years after signing the contract: interest is taxed only 7.5% after an allowance of € 4,600 if you are alone or € 9,200 if you are in a relationship.
A reduction of € 4600 means that you can withdraw more without tax. In fact, in the amount withdrawn, only part of the interest is taxable.
Read: Life insurance: can I withdraw my money without paying taxes?
Example: You open your life insurance contract with € 10,000. Fifteen years later, this one is worth € 25,000. Therefore, the interest share is 25,000 – 10,000 = € 15,000, or 60% of the total value of your contract.
If you withdraw € 5000, the insurance company will apply the same proportion: 60% interest. That is to say that with 5000 euros withdrawn, there will be 40% capital and 60% interest. That is 5000 x 60% = 3000 euros of taxable interest.
The deduction is € 4600 per person, you will not be taxed (CSG and CRDS social security contributions will remain payable).
Your banker or insurer can help you do the math to make the most of your allowance.
3- Between two contracts of less than 8 years, draw from the least taxable
If you hold two contracts of less than 8 years, better favor the issuance of new contracts: “between 2 contracts under 8 years old, one signed before September 2017, the other after, it is better to favor the issuance of the latest: interest is taxed at 12.8%. On the other hand, if you pay on previous contracts, in the event of a discharge between 4 and 8 years, they are taxed at 15%”, nuance Florence Brau Billod, president of Patrimoine SA in Marseille.
4– Favor withdrawals on underperforming contracts
Read the documents provided by your insurance company: they tell you the value of your contract and the cumulative amount of income, i.e., interest. To find out what the proportion of capital and interest is, divide the amount of proceeds by the amount of the contract. If you have two contracts, perform the same operation on both. If you can’t take advantage of the discounts, choose the worst contract performance: you will have less interest on the part withdrawn and therefore less tax to pay.
Also read: Life and property insurance: two advantages to keep in mind
5 – Split your purchases over 2 calendar years to benefit from two deductions
On contracts for 8 years, to take full advantage of the annual allowances of € 4,600 (or € 9,200 if you are married), split your withdrawal.
Example: you hold a life insurance policy of € 320,000 plus € 80,000 of accrued interest (ie 25%). If you want to withdraw € 50,000, the interest portion is € 12,500 (25%). The rest is capital, not taxable.
The trick: to avoid paying tax in the amount in excess of € 9,200 (if you are in a relationship), you can only withdraw € 30,000 in 2022 and € 20,000 in 2023. Result: no tax to pay.
6-Flat-rate deduction or tax depending on your income … choose the lowest
In the event of taxable redemption, you have the choice between applying flat-rate direct debit where the taxation of interest, which will be included on your tax return. Your earned interest will be subject to the maximum tax bracket that applies to your income (called the marginal tax bracket).
For payments made before 2017, the flat rate levy is 15% if your contract is between 4 and 8 years old or 7.5% if over 8 years old.
For payments made after September 2017, the flat-rate deduction is 12.8%.
Logic dictates that you choose income tax if your marginal bracket is lower than these flat rates. “However, be careful if you are not taxable, declaring your life insurance income on your income may cost you tax and therefore not be eligible for certain assistance. Or you move to the top bracket“, warns Florence Brau Billod. If you are within the limit of a tax bracket (€ 10,430 annual income without tax, between € 10,430 and € 26,591 annually will be taxed at 11%), it may be wise to opt for flat-rate deduction despite everything.
Good to know: to choose, you can ask your bank or insurer to calculate the amount of interest that is subject to different tax rates. You need to do it in advance!