How does life insurance work?

How does life insurance work?

Life insurance is part preferred investments many people. And for good reason: its operation provides many advantages. Security, yield, transmission: this investment combines the advantages. However, the principle of life insurance remains unknown to the general public. How does life insurance, this flagship savings product, work?

Discover in this article all the workings of life insurance. We will review the different actors, the tax framework, the methods of payment and withdrawal. We will also discuss the possible diversification according to your objectives.

Thanks to these detailed explanations, there is no doubt that the functioning of life insurance will soon have no more secrets for you! But before we start, here's Monetized his social network experience?

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🎉 What is life insurance?

Life insurance is an insurance contract that allows you to build up capital and pass it on to designated beneficiaries in the event of death. Operation is as follows.

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The subscriber opens a life insurance contract with an insurance company. He makes payments called premiums on this contract. These premiums are invested in different media that the subscriber can choose. The premiums placed grow over time thanks to the interest generated.

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In the event of the subscriber's death, the insurer pays a lump sum or an annuity to the beneficiaries designated in the contract. The subscriber also has the option of making withdrawals during his lifetime if he needs to recover part of his savings.

The tax advantage of life insurance is that the gains generated during the term of the contract are income tax exempt, even if social security contributions remain applicable. The transmission of capital on death also benefits from a privileged tax framework.

🎉 How does life insurance work?

Do you want to take out life insurance? Here are the elements to take into account:

✔️Life insurance players

Life insurance involves different actors:

  • The insurer is the company insurance company that markets the life insurance policy. He undertakes to pay a lump sum or an annuity in the event of death.
  • The subscriber is the person who opens the contract and pays the premiums. It designates the beneficiary(ies) in the event of death.
  • The beneficiary receives the death benefit provided for in the contract. You can designate whoever you want: spouse, child, other relative, association, etc.
  • The insured is the person on whose head the contract rests. His death triggers the payment of the capital to the beneficiary(ies).
  • La management company manages the funds invested in the contract if it is in units of account. She makes the investments.

The subscriber can be both insured and beneficiary if he opens the contract for himself. But you can designate different people for each of these roles. This is the strength of life insurance to pass on a heritage.

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How does life insurance work? 4

✔️ Life insurance costs

Life insurance involves certain costs that are important to be aware of:

  • Fees on payment: it is a percentage deducted by the insurer from each premium paid. On average from 2 to 5%.
  • Management fees : these are the annual contract management fees. They are around 0,6 to 1% per year.
  • Arbitration fees: these are the costs set by the insurer in the event of an internal fund change. Limited by law.
  • Exit fees: this is the amount deducted by the insurer in the event of total surrender. Degressive over time. Generally nil after 8 years.
  • Management mandate fees: if you opt for this solution, count approximately 1% in addition to the other costs.
  • Unit-linked fees: these are the internal management costs for the chosen UC supports.

These various costs eat into the performance of life insurance. Compare contracts carefully to reduce the bill. Some insurers are more competitive than others.

✔️Investment supports

Life insurance allows you to invest in different types of support:

  • The fund in euros: this is the safest option. The insurer guarantees your capital and pays a minimum annual return. About 1 to 2% currently.
  • Units of account: these are risky investment vehicles (equities, real estate, bonds, etc.) whose return is not guaranteed. Potentially higher but risk of capital loss.
  • Mixed media or profiles: they combine the fund in euros and the units of account according to a distribution adapted to your profile.
  • Funds on the horizon: these are vehicles whose allocation automatically evolves towards more cautious investments as the chosen maturity approaches.
  • SCPIs/OPCIs: you can also invest part of your contract in real estate via SCPI or OPCI shares.

You have the choice to distribute your payments between these different supports according to your objectives and your appetite for risk. Do not hesitate to diversifyr to optimize the return/risk ratio.

✔️The taxation of life insurance

Life insurance benefits from a very advantageous tax framework. Payments are not capped. You can pour up to €150 per year tax-free. The interest produced is exempt from income tax as long as the contract lasts (except for social security contributions).

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On death, the capital is transferred outside the estate. Only social contributions are payable by the beneficiary. Withdrawals are tax exempt income up to €4 for a single person and €9 for a couple.

Beyond that, they are taxed at 7,5% up to 8 years of ownership, then totally exempt. Thanks to this very flexible taxation, life insurance allows maximum tax optimization.

Your investments grow in a privileged environment. However, the tax landscape may change in the future, like any system.

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How does life insurance work? 5

✔️ Estate benefits

Life insurance has certain advantages in terms of transferring wealth. Death benefits are paid directly to the designated beneficiary(ies). They thus escape the succession.

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This makes it possible to benefit a particular beneficiary without arousing suspicion of disguised donation. The sums are immediately available without going through the estate. This speeds up the process.

The designation of beneficiaries can be modified at any time. The underwriter keeps control. The death benefit is not included in the estate assets. No need to declare it to taxes with the rest.

Tax on the death benefit limited to social contributions for the beneficiary (17,2% in 2023). Life insurance thus makes it possible to pass on part of one's heritage at lower tax cost. Do not hesitate to use it in addition to a donation or a will.

🎉 Conclusion

Life insurance is an investment that is both simple and very effective thanks to its advantageous taxation and its flexibility of use. By combining security, performance and transmission, it meets multiple heritage and financial objectives.

This flagship placement, however, requires understanding how it works in detail. The roles of the insurer, the policyholder and the beneficiary are essential. Carefully compare the fees charged. And know how to take advantage of the many investment vehicles on offer.

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Used well, life insurance will provide you with long-term support to grow your savings and pass them on more efficiently. Do not hesitate to seek advice from Finance de Demain to select the contract that best meets your needs and projects.

Thanks to this complete overview, you should now better understand all the workings of this flagship investment. Life insurance will have no more secrets for you. You are ready to make the most of it!

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