No, the money placed on your life insurance is not frozen! You can use it whenever you want by the so-called partial redemption. You can redeem a portion of your savings, but your contract still stands and you generate interest on the remaining principal. Do you hesitate for fear of paying taxes? No thanks necessary ! First, you may be able to withdraw completely tax-free. Then, when this is applied, taxes are very limited.
1 – Prioritize your old insurance policies
If you carry old decade life insurance, Interest arising on amounts invested prior to January 1, 1998 is completely exempt from income tax.
2- Do your calculations and make the most of your tax exemption
For payments made after and until 27 September 2017, Taxes are reduced in case of withdrawal for at least 8 years After signing the contract: Interest is taxed at only 7.5% after a provision of €4,600 If you are alone or €9200 If you are in a relationship.
This means a reduction of 4,600 euros You can withdraw more tax deductible. Indeed, on the amount withdrawn, Only the interest portion is taxable.
Read: Life Insurance: Can I Withdraw My Money Without Paying Taxes?
Example: You opened a life insurance contract for 10,000 euros. Fifteen years later, this amount is worth 25,000 euros. So the interest share is 25,000 – 10,000 = 15,000 euros, or 60% of the total value of your contract.
If you withdraw 5000 euros, The insurance company applies the same rate: 60% interest. That is, in the event of a withdrawal of 5,000 euros, there will be 40% of the capital and 60% of interest. That is 5,000 x 60% = 3,000 euros in taxable interest.
The reduction is 4600 euros per person, You will not be taxed (CSG and CRDS contributions remain due).
Your bank or insurance company can Helps you make calculations to get the most out of your benefits.
3- Between two contracts with a period of less than 8 years, the lowest tax contract is drawn
If you carry Two contracts of less than 8 years, It is better to prefer the release of newer contracts: “Between two contracts of less than 8 years, one of which was signed before September 2017, and the other after, it is better to prefer the release of the most recent: Interest is taxed at 12.8%. On the other hand, if you have made payments on previous contracts, in the event of an exit between 4 and 8 years, they are taxed at 15%”, nuance Florence Brau Bellud, President of Patrimoine SA in Marseille.
4- Prefer withdrawals over lower performing 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 the principal and interest ratio, divide the amount of proceeds by the value of the contract. If you have two knots, perform the same process on both. If you can’t take advantage of the discounts, choose Worst performing contract: You will have less interest in the portion withdrawn and therefore you will have less taxes to pay.
Read also: Life and Property Insurance: Two Features to Remember
5 – Split your redemptions over two calendar years to take advantage of two discounts
On contracts of more than 8 years, To take full advantage of the annual allowance of €4,600 (or €9,200 if you are a married couple), divide the withdrawal amount.
Example: You have a life insurance policy of €320,000 including €80,000 of accrued interest (ie 25%). If you want to withdraw 50,000 euros, the interest share is 12,500 euros (25%). The rest is capital, not taxable.
the trick: To avoid paying tax on the amount exceeding 9,200 euros (if you are in a relationship), you can only withdraw 30,000 euros in 2022 and 20,000 euros in 2023. Result: No tax payable.
6 – Discount or flat tax depending on your income … choose the lowest
In the event of a taxable refund, You can choose between applying direct debit at a fixed price where Interest tax, to be included on your tax return. Thus, your interest earned will be subject to the highest tax bracket applicable to your income (called the marginal tax bracket).
For payments made before 2017, The flat rate tax is 15%. If your contract is between 4 and 8 years or 7.5% if over 8 years old.
For payments made after September 2017, the flat rate discount is 12.8%.
Logic dictates that you choose income tax if your marginal bracket is below these flat rates. “However, be careful if you are not taxable, declaring life insurance income in your income can make you taxable and therefore ineligible for certain assistance. Or make you move to the top bracket”, warns Florence Brau Bellud. If you are in the tax bracket limit (€10,430 annual income tax-free, between €10,430 and €26,591 per year you will be taxed at 11%), It would be wise to opt for a flat rate discount despite everything.
good to know: to make your choice, You can ask your bank or insurance company to calculate how much interest is subject to different tax rates. You have to do it early!