Operating life insurance buyback

Operating life insurance buyback, partial or total?

Buyout of life insurance: partial or total buyback, taxation and details
Contrary to popular belief, a life insurance policyholder can have their money on hand at any time. To do this, all he has to do is ask his insurer for the partial surrender or the total surrender of his contract. How does the system work?

How does the surrender of life insurance work?
Taxation at the time of redemption
How life insurance buyback works

Redemption is the mechanism that allows the subscriber of life insurance to recover, before the end of his contract, the total or partial payment of the sum he has invested. This is a right of the insured and no insurer can refuse it. There are 2 types of redemption:

Total redemption, which consists of withdrawing all of the savings before the end of the contract. It leads to the final closure of the contract;
Partial redemption which allows the subscriber to recover only part of his savings. The procedure for performing this operation may be different from one insurance company to another.
In principle, a life insurance contract can be redeemed at any time if the following 2 conditions are met:

The contract is redeemable;
The beneficiary of the contract has not accepted the benefit or gives its authorization in writing.
In general, there are no fees associated with surrendering a contract. The majority of life insurance contracts are installment or free withdrawal contracts. However, there are rare contracts that provide for early exit penalties. The amount of these penalties is generally provided for in the conditions of the contract.

What about the taxation of redemptions?

Whether it is a partial surrender or a full surrender of life insurance, only the interest generated by the investment is taxable. When the redemption is total, it is relatively easy to determine the taxable income: the difference between the capital invested and the sums recovered. When the surrender is partial, taxable income = partial surrender amount - (total premiums paid on the surrender date x partial surrender amount / total surrender value on the partial surrender date.

As regards the taxation itself, the subscriber has the choice between 2 options: submission to income tax or lump-sum discharge directly operated by the insurer. In this second case, the tax rate will vary depending on the time of redemption:

Redemption between the 1st and the 4th year: 35%
Redemption between the 5th and 8th year: 15%
Redemption after the 8th year: 7.5%
If the redemption is made after the 8th year, the subscriber is entitled to an annual deduction on products of 4,600 euros for a single person and 9,200 euros for a married couple supporting the same tax regime. In addition to these compulsory levies, life insurance products have been subject to social security contributions at the rate of 17.2% since January 1, 2018.

It is important to note that redemptions are not subject to income tax, regardless of the duration of the contract, when they are carried out following the occurrence of one of the events provided for by law: dismissal, early retirement, 2nd or 3rd category disability, cessation of self-employed activity due to a court-ordered liquidation judgment. But even so, redemptions remain subject to social security contributions, except for the occurrence of a disability.