Life insurance: An essential tool for wealth planning
- Max Faller
- Jan 16
- 3 min read
Did you know that life insurance offers significant tax advantages?
In this article, we will discuss this advantageous tool in terms of taxation, wealth transfer, and investment, and explore how to use it effectively.
1. What is life insurance?
A life insurance policy is a savings contract taken out with an insurer, allowing you to grow your capital while benefiting from certain tax advantages.
2. What is the purpose of life insurance?
A life insurance policy can help achieve several goals:
Building wealth.
Growing capital.
Preparing for retirement.
Saving for a real estate project.
Securing the future of your children or grandchildren.
This insurance contract, accessible to everyone, allows you to save money flexibly. It can be funded at any time, with no obligation to make payments. In other words, once you have taken out a life insurance policy, you are free to make additional contributions 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 enjoys favorable taxation in both 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%, plus additional charges (Solidaritätszuschlag and, if applicable, Kirchensteuer). However, German taxation only applies to the portion of gains and interest generated by the investment.
After returning to France and becoming a French tax resident, your German life insurance policy will benefit from French tax advantages. Gains after eight years are eligible for an annual tax allowance of €4,600 (for a single person) or €9,200 (for a couple) and a reduced tax rate (7.5% after the allowance on realized gains).
If you are a German tax resident, it is essential to declare your French life insurance policy to avoid the risk of double taxation.
Since Germany and France have a tax treaty, you can benefit from a tax credit in one country to avoid being taxed twice.
Click this link to learn more: Éviter la double imposition entre la France et l’Allemagne : Stratégies clés.
4. Wealth transfer
Life insurance is also an excellent tool for wealth transfer. This type of 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 depend on the policyholder's age and the amounts of premiums paid. Contributions made before the age of 70 benefit from an allowance of €152,500 per beneficiary.
In Germany: If you designate beneficiaries in your life insurance policy, they will directly receive the capital. Depending on the degree of kinship and applicable exemption thresholds, inheritance taxes may vary.
5. Financial investment
Life insurance remains a flexible and attractive investment product, offering the possibility to choose from different types of investment vehicles:
Euro funds: Provide maximum security as they guarantee the capital, but returns are relatively low.
Unit-linked funds (stocks, bonds, real estate, etc.): Offer potentially higher returns but come with a risk of capital loss. This option allows you to diversify your investments across 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 tax allowances before changing your tax residence. However, it is important to stay informed about both German and French tax obligations to avoid double taxation.
Optimize wealth transfer: Choose your beneficiaries carefully. In France, designating multiple beneficiaries allows you to maximize tax exemptions.
Diversify your investments: Use life insurance to diversify your investments by taking advantage of the different investment options available. You can adjust your choices based on your short- or long-term goals.
Consider portability: All else being equal, your German contract enjoys the same portability.
Conclusion
Life insurance is an excellent tool for preparing for retirement, transferring wealth, and optimizing savings. Properly managing taxation between the two countries and tailoring the contract to your needs is essential to maximize its benefits.
Schedule an appointment with our financial advisors to receive personalized guidance.