What are the inheritance rights of life insurance?

What are the inheritance rights of life insurance

What are the inheritance rights of life insurance?

Life insurance is an excellent tool for estate optimization. Via the beneficiary clause, you can designate one or more people who will receive, after your death, a capital or an annuity under favourable tax conditions. However, it remains to understand the rules of succession. Depending on the date of purchase, or the age at which you pay the premiums, the tax treatment will differ. So what are the inheritance rules for life insurance? All our answers!

Summary

  • Who are the beneficiaries of life insurance in the event of inheritance?
  • What happens to life insurance after the death of the insured?
  • What is the scale of inheritance tax for life insurance?
  • Premiums paid before age 70, what impact on the succession of life insurance?
  • Premiums paid after 70 years, what consequence on the succession of life insurance?
  • What is the taxation of old life insurance during transmission?
  • Who benefits from the inheritance exemption from life insurance?
  • Can we disinherit through life insurance?
  • How long does it take to get life insurance?
  • What is the interest of dismembering the beneficiary clause in life insurance?

Who are the beneficiaries of life insurance in the event of inheritance?

Life insurance allows its subscriber to transmit, on his death, a capital to one or more specified beneficiaries, mentioned in the “beneficiary clause”, which is an essential element of the contract. The beneficiaries designated for the succession of life insurance are “outside the succession”.

In terms of taxation, life insurance enjoys a special treatment: it will not include inheritance assets in most cases. One of the main advantages of this type of contract is allowing you to optimize your succession.

Traditionally, you choose your beneficiaries when you subscribe. It is also possible to modify the clause during the contract’s life, for example, because you have changed your mind or if one of the designated persons has died.

You can name one or more natural or legal persons as beneficiaries of the life insurance, for example:

  • your spouse;
  • a child ;
  • a friend ;
  • a nephew ;
  • an association.

The clause thus allows you to favour a person who has only a weak relationship with you or who has none at all. In the event of failure to designate, your contract’s capital (and interest) will return to the estate on death, thus losing its tax advantage.

Life insurance is, therefore, a very effective tax optimization tool. However, not all contracts are created equal. The return and associated costs can vary from one to two depending on the organization. The good contracts of yesterday are no longer those of today, so let the competition work! When buying life insurance, you do not lose your advantages but can benefit from higher profitability!

What happens to life insurance after the death of the insured?

The insurance company must inform of the death of the subscriber to proceed with the payment of the capital to the beneficiary (ies). It seems logical, but it is not always the case! Indeed, the phenomenon of escheat (that is to say, when a contract is not claimed) is more frequent than one thinks.

It is in principle for the beneficiaries (if they are aware of their quality) to turn to the insurer, the bank, or even the mutual to request the outcome of the deceased’s life insurance.

If in doubt about the existence of such a contract, do not hesitate to turn to the AGIRA association, which will carry out a free search. You can do it through the online form or by sending a simple mail to:

mail

AGIRA
Search life insurance contracts

1, rue Lefebvre
75431 Paris Cedex 09

Once the insurer has been informed of the death, he will have to find all the beneficiaries and release the funds after obtaining the necessary supporting documents: death certificate, identity document if you are mentioned by name as beneficiary. Your notary may submit a partial estate declaration, which will allow the beneficiary (ies) to obtain the funds more quickly.

In terms of the payment period, the insurer has one month– from the reception of the documents – to proceed with the payment of the capital to the beneficiary (ies), under the penalty of having to pay interest after this period. The notary in charge of the succession can also search for life insurance contracts possibly taken out by the deceased by turning to the FICOVIE register (which lists all the contracts opened in France).

What is the scale of inheritance tax for life insurance?

Benefit from a different treatment, life insurance does not join the estate assets (except for the part of the premiums paid after 70 years and exceeding € 30,500). In addition to the € 152,500 reduction granted to each beneficiary (for premiums paid before age 70), the life insurance tax regime sets a very preferential rate of 20% tax (up to € 852,500 paid to the same person), whatever the degree of kinship between the deceased and the beneficiary.

If we compare this to the applicable rate, for example, in inheritance between brother and sister (35% after a “small” allowance), we quickly understand the interest of life insurance!

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Here are the rates in effect online: 

  • taxable fraction of less than € 8,072: 5%;
  • taxable fraction between € 8,072 and € 12,109: 10%;
  • A taxable fraction between € 12,109 and € 15,932: 15%;
  • taxable fraction between € 15,932 and € 552,324: 20%;
  • taxable fraction between € 552,324 and € 902,838: 30%;
  • A taxable fraction between € 902,838 and € 1,805,677: 40%;
  • taxable fraction above € 1,805,677: 45%.

Discounts applicable to the transfer of life insurance:

AbatementFor who ?
Direct line transmission100,000 €A child
Transfer for the benefit of a disabled heir or legatee€ 159,325A child (example)
Transmission between siblings€ 15,932Brothers Sisters)
Transmission to nephew / niece€ 7,967Nephew (s) / niece (s)
Allowance in the absence of another allowance€ 1,594Parents up to the 4th degree (example)
What are the inheritance rights of life insurance?

Two important elements to remember in terms of inheritance tax:

  • several levels of reduction are provided for, depending on the degree of kinship with the deceased;
  • the inheritance tax rate is progressive (it increases with the amount transferred) and depends on the family relationship.
  • What are the inheritance rights of life insurance

Premiums paid before age 70, what impact on the succession of life insurance?

The age at which the insured pays the premiums on his life insurance contract impacts the taxation applicable when the life insurance capital is transferred to his beneficiary (ies). The payment date also. The rules below apply to payments made after October 13, 1998.

Concretely, for the part of the payments made before the subscriber’s 70th birthday, each designated beneficiary enjoys, on the capital he receives, a tax allowance of 152,500 € (article 990 I of the General Tax Code). Beyond this amount, the tax is 20% on the 700,000 “first” euros, then 31.25% if the capital (+ interest) he receives exceeds 852,500 €.

In principle, there is no maximum amount or ceiling for life insurance that a beneficiary can receive unless the premiums are deemed “manifestly exaggerated” by a magistrate.

Taxation for life insurance payments before age 70:

Tax allowanceTaxation from 152,500 € to 852,500 €Taxation for the part over 852,500 €
Premiums paid before age 70€ 152,50020%31.25%
What are the inheritance rights of life insurance?

The tax allowance, combined with a lower tax rate than conventional inheritance tax (especially if the beneficiary is a third party!) Therefore, the share of the capital that exceeds it allows you to pass on sums upon death. Important under favourable conditions.

Since the TEPA law of 2007, the surviving spouse or PACS partner has been exempt from inheritance tax. It also applies to life insurance.

Premiums paid after 70 years, what consequence on the succession of life insurance?

The fate of premiums paid on life insurance after the insured’s 70th birthday is different. The capital will return to the estate after a general allowance (valid for all life insurance contracts / all beneficiaries) of € 30,500. It will be subject to conventional taxation according to the rate applicable for each heir. However, the portion corresponding to interest will be exempt (excluding social security contributions of 17.20%).

Taxation for life insurance payments after 70 years:

General allowance (all beneficiaries / contracts combined)Taxation
Premiums paid after age 70€ 30,500 (on capital only)Inheritance tax
What are the inheritance rights of life insurance?
  • if the contract is for less than € 30,500, the capital will be transferred without being taxed;
  • If it exceeds this sum, only the spare part will be subject to the inheritance tax scale, making it a less attractive solution than it had paid the premiums before the subscriber’s 70th birthday.

The deduction on the inheritance is shared between the beneficiaries (if there are several) according to their share.

What is the taxation of old life insurance during transmission?

By “old” means life insurance contracts taken out more than 25 years ago and not unwound (i.e. the policyholder is still alive). These contracts opened during the heyday of life insurance. From a tax standpoint, they are excessively profitable, whether in terms of redemption or estate optimization.

It was not until October 13, 1998 (whether at the level of the opening of the contract or the date of payment of premiums) that the current rules were introduced.

Thus, life insurance policies taken out before November 20, 1991, and the premiums paid before October 12, 1998, are quite simply exempt from tax when the capital is transferred, regardless of the value of the contract! It also applies to premiums paid before age 70 as well as after.

  • For contracts opened between November 20, 1991, and October 12, 1998, and for which paid the premiums before October 13, 1998:
  • exemption from premiums paid before age 70;
  • Reduction of € 30,500 and inheritance tax beyond that for premiums paid after 70 years
  • What are the inheritance rights of life insurance

Who benefits from the inheritance exemption from life insurance?

The TEPA law of 2007 (in favour of work, employment and purchasing power) establishes an essential tax rule: the surviving spouse, or the civil partnership partner, is exempt from inheritance tax when he receives a share. The inheritance of the deceased spouse, regardless of the amount received.

The objective of this measure is to protect the surviving spouse by allowing him to maintain his standard of living and not find himself responsible for the children.

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What are the inheritance rights of life insurance?

This rule also applies to life insurance. The capital received by the spouse of the deceased insured will not be taken by the Fisc, whatever its amount. The age at which the subscriber made his payments has no effect. Thus, where the donation between spouses (while living) gives the right to a tax deduction and a tax rate that evolves according to the total sum, this is not the case about inheritance!

Can we disinherit through life insurance?

Life insurance is an excellent tool for optimizing your succession but can also, conversely, make it possible to disinherit, in part, your children. Indeed, one of the advantages of life insurance is that it allows a transfer of capital outside of inheritance. Thus, the money saved there will not be taxed as part of the succession nor shared between his heirs.

The sums in his life insurance may be excluded from the inheritance if the designated beneficiaries are different from the “reserved” heirs. Thus, if life insurance does not make it possible to disinherit one’s children, it offers the possibility of transmission to the person (or people) of their choice.

Thus, even if life insurance does not make it possible to disinherit those around him, it is an excellent tool to favour a beneficiary, heir or not.

In the event of the beneficiary’s death (ies) designated by your life insurance, the capital will be transferred to the secondary beneficiary (ies). In the absence of this mention, it will be the heirs or beneficiaries, and the capital will enter the estate.

How long does it take to get life insurance?

The insurer has 15 days from receipt of the death notice to ask the beneficiaries to provide the documents necessary for the payment of the capital. Once the supporting documents have been received, the insurer has one month to pay the capital to the beneficiary / ies. Beyond this period, the unpaid capital produces interest:

  • 6.52% for 2 months;
  • 9.78% after two months.

To find out the starting point for the one month following receipt of the attachments, send them by registered letter acknowledging receipt.

What is the interest of dismembering the beneficiary clause in life insurance?

The principle of the dismemberment of the beneficiary clause of life insurance (the dismemberment only concerned real estate for a long time) is to distinguish, during the transmission of capital:

  • a usufructuary, that is to say, a person who will have the use and the right to make the capital growth, without being the owner;
  • A bare owner will recover full ownership at the end of the usufruct, that is to say (in most cases) on the death of the usufructuary.

In general, the usufruct (or quasi-usufruct when related to a sum of money) is for life. Full ownership will restore the death of the usufructuary. Most of the time, it is the surviving spouse who will designate as usufructuary: he will then benefit from the capital and may, if necessary, use it and collect the fruits (i.e. interest), at responsible for transmitting on his death a capital at least equivalent to the bare owners, who are often the children of the deceased couple.

The main risk is that the usufructuary completely squanders the capital before death. The bare owner could then end up with a much smaller sum than what the subscriber would have wanted at the outset.

The interest of the practice lies, among other things, in its tax leverage effect. The reduction of 152,500 € (for premiums paid before age 70) is shared by the usufructuary – bare owner couple, according to distribution depending on the age of the usufructuary. In terms of taxation:

  • the surviving usufructuary spouse will pay nothing since he is exempt from the TEPA law;
  • The bare owner (the couple’s child) will be taxed on a smaller part (for example on 60% of the amount transferred), which will reduce the tax base. In addition, during the reconstitution of full ownership, that is to say, on the usufructuary’s death, he will recover the capital without any taxation.
  • What are the inheritance rights of life insurance

Dismemberment of the beneficiary clause of the life insurance:

Usufruct valueBare ownership value
Usufructuary between 21 and 30 years old80%20%
Usufructuary between 31 and 40 years old70%30 %
Usufructuary between 41 and 50 years old60%40%
Usufructuary between 51 and 60 years old50%50%
Usufructuary between 61 and 70 years old40%60%
Usufructuary between 71 and 80 years old30 %70%
Usufructuary between 81 and 90 years old20%80%
Usufructuary over 90 years10%90%
What are the inheritance rights of life insurance?

The usufructuary couple – bare owner can also be composed as such: usufructuary children and bare owner children.

Frequently Asked Questions:

How to designate the beneficiary (ies) of a life insurance contract?

When subscribing, the insured can designate one or more beneficiaries in several ways:

  • by naming them directly in the contract; 
  • or by using an impersonal formula like: “my spouse, failing this my unborn children / my heirs”, etc.

He can also designate a beneficiary by will at the notary and inform the insurer.

Is life insurance subject to inheritance tax?

No, life insurance is not subject to inheritance tax. It benefits from a more advantageous tax system that depends on several factors: the date of subscription of the contract, the date of the payments, and the insured’s age during the payments. Depending on these criteria, the inherited capital may be exempt or be subject to taxation of up to 31.25%.

Do you have to declare life insurance to the notary during a succession?

The notary does not need to know the existence of a life insurance contract taken out by the deceased insured. With one exception: contracts taken out after November 20, 1991, the subscriber paid certain premiums after his 70th birthday. These contracts benefit from a tax deduction of € 30,500. Any paid-up capital beyond this amount will be taxed according to inheritance tax.

How long does it take to receive life insurance after the death of the subscriber?

The insurer has 15 days from receipt of the death notice to ask the beneficiaries to provide the documents necessary for the payment of the capital. Once received, the insurer has one month to pay the capital to the beneficiary / ies. Beyond this period, the unpaid capital produces interest:

  • 6.52% for 2 months;
  • 9.78% after two months.

Can I inherit more than one life insurance policy?

Sure. If you have been designated beneficiaries of more than one life insurance policy, you will inherit each of them. There is no limit to being named beneficiary of life insurance.

What are the inheritance rights of unrelated life insurance?

You can completely designate beneficiaries you are not related to in your life insurance contractFor example, you have every right to designate a legal person (association, institution) as a beneficiary. However, in the event of non-designation of the beneficiary (ies), the capital of your life insurance will enter into the estate assets at the time of your death.

What are the inheritance rights of life insurance?

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