Life insurance, how does it work? [Guide complet]

Life insurance, how does it work? [Guide complet]

how does life insurance work? Here is a complete guide to the most frequent queries (Credits: Adobe Stock)

How does life insurance work? Here is a comprehensive guide to the most common questions.

Unparalleled asset management tool but also multifunctional investment, life insurance remains the most popular savings product for French households.

However, life insurance remains relatively poorly known to savers, especially on everything relating to the multiplicity of its uses, choosing the right contract according to its needs or even the subtleties of the taxation applicable to it.

In addition to these concepts, this guide also addresses the most common questions that savers ask themselves about their contract: how to navigate between the different supports available and on which to invest, why the yield of the support in euros decreases year after year , understand the interest of the beneficiary clause, how to tap into a contract by controlling the tax parameter.

The guide is also interested in the evolution of contracts desired by the public authorities and the addition of new supports such as euro-growth or private equity and their interest for savers.

How does life insurance work?

Legally, it is a contract concluded between an individual (the subscriber) and a financial intermediary (a bank or an insurance company). We also often hear the term insured in the contract. It is in fact the person whose death conditions the payment of the capital by the insurer. Usually, the policyholder and the insured are the same person.

Finally, it is necessary to mention the beneficiary of the contract who is the person designated by the subscriber of the contract to receive the capital in the event of the death of the insured. The beneficiary can also be a legal person (association or foundation). The payments made on the contract by the subscriber can be invested in different types of financial products. Basically, we must distinguish two main categories of support: the fund in euros, very secure, in which the subscriber is guaranteed to recover the amounts he has invested.

It is also possible to invest in units of account whose value development is linked to the financial markets. If this support is more risky than the euro fund, it can make it possible to deliver a higher performance than that which would be obtained on the euro fund. It is possible to mix your payments on the two categories of media.

There are two types of life insurance contracts on the market. Historically, the first ones that were marketed only made it possible to invest in the euro fund alone. We are also talking about single-support contracts. Contracts allowing access not only to funds in euros but also to units of account appeared later. They are called multi-support contracts. This is the type of contract most commonly offered by different distributors (banks, insurance companies, internet brokers, wealth management advisers, private banking)

Read also: Life insurance: the different players involved

What are the advantages of life insurance?

Life insurance is a multifunctional savings product that allows you to grow capital, build up precautionary savings or prepare for retirement.

It is also an unparalleled asset management tool since it allows capital to be transferred outside the framework of the inheritance to people that the subscriber will have designated in the contract by means of the beneficiary clause.

Even if they are most often members close to the subscriber (children, grandchildren, spouse), it is possible to designate people outside the family circle. The sums are transmitted in a particularly advantageous tax framework, since they are exempt from tax below 152,500 euros per beneficiary. Another plan applies to premiums paid by the subscriber after his 70th birthday. In this case the payments are exempt from inheritance tax up to 30,500 euros. On the other hand, the interest generated by the payment of premiums is exempt from taxation.

This multifunctional aspect explains why life insurance is one of the favorite products of the French, after real estate.

In 2018, the total outstanding life insurance contracts exceeded 1.700 billion euros. Note that we often confuse life insurance and death insurance. While the first is a savings product, the second relates to the field of provident funds.

Death insurance works on the principle of annual payment by the subscriber of a contribution, which will change according to his age, and in return for which the insurer undertakes to pay a capital to the persons designated upon the death of the subscriber.

Read also: Life insurance: what is the tax on the death of the subscriber?

How to choose life insurance?

Due to its success, life insurance is subject to fierce competition between different distributors. You can take out a contract in a bank branch, with a general insurance agent, a mutual society, a savings association or a wealth management advisor. Private banks also offer them. Finally, it is possible to subscribe without leaving home thanks to the rise of online contracts.

Each network displays its specificities. Thus, bank branches represent a not insignificant part of life insurance collection. The products are very varied and are supposed to meet the needs of different customer segments (young workers, wealthy customers, wealthy people). They should be compared carefully because they can turn out to be charged with costs with financial performances which do not allow these costs to be offset. The fund offer often gives pride of place to media marketed only by the bank’s management company.

The contracts offered by savings associations or mutuals have funds in euros which show good performance over the long term. Less charged in costs than banking contracts, however, they suffer from a financial offer that is often less extensive than other distributors. Internet contracts do not charge entry fees and offer an extensive financial offer. However, they require a certain autonomy on the part of the subscriber who will have to accomplish all of his procedures from his computer.

Read also: life insurance: operation and objectives

What are the costs of life insurance?

Fees on installments, management or arbitration. Taking out a contract is an opportunity to pay multiple costs to the insurance company. You have to know how to evaluate them precisely to assess the performance of a life insurance contract. They vary from one contract to another.

The fees on payments, also called entry fees, are deducted when the subscriber makes a new payment on his contract. Non-existent in online contracts, they can fluctuate between 1% and 3.5% within other distribution networks. They are very often negotiable downwards, especially if the subscriber pays a large amount into his contract. Sometimes, but it is increasingly rare, there are administrative fees linked to the opening of the contract. The good news is that these fees are only taken once at the time of purchase.

Management fees are deducted each year throughout the duration of the contract. They relate to the total amount invested (after deduction of any payment charges) and the interest they have generated. Their basis of calculation is therefore required to progress over time as the outstanding amount increases. We must therefore ensure that they are not too important. They are generally between 0.40% and 1.5%, all media combined (euro funds and units of account) and are fairly consistent from one distributor to another. They are often higher on units of account than on the euro fund.

When the subscriber decides to modify the distribution of his savings, by transferring it to another medium in the contract, he must generally pay arbitration fees. Each insurer decides on the billing method: some proceed by flat rate or as a percentage of funds arbitrated. Some contracts work both ways. More and more online contracts make them free and therefore no longer charge their customers for them.

Read also: Payments on a life insurance contract

What should I check before subscribing?

It is often more interesting to take out an accessible life insurance contract, that is to say one that allows you to invest from a hundred euros in order to easily create a saving habit.

Nothing prevents the subscriber from subsequently modulating his payments with larger amounts. The costs taken in the contract are also important. Lightly loaded contracts are also contracts that allow you to invest more and ultimately obtain more profitability.

But there is no martingale. To assess the weight of the costs on the contract, the subscriber will have to sift through them and measure the respective weight of the costs within each of them. To get an idea, the method of multiplying the management fee rate by the number of years considered for the contract is interesting. Do not forget to add the amount of the entrance fees.

The profitability of the contract is also essential. The subscriber should consult the specialized press and look at the performance of the fund in euros over several years. The unit-linked component must also be expanded in the contract in order to allow good diversification over the long term.

The management methods proposed must also attract the attention of the investor. The more there are, the more they allow to develop long-term strategies.

Read also : Life insurance: the different types of management

Can we build up precautionary savings with life insurance?

If in principle, life insurance is a product intended for the long term, it is quite possible to use it for the purpose of building up precautionary savings.

First of all, because the money invested in life insurance is never blocked. Then because unlike a regulated passbook which is always capped, life insurance has no deposit limit.

It is therefore quite possible to use this envelope to cope with a hard blow or to remunerate cash in order to finance another medium-term project.

However, two things must be taken care of. First, if it is a question of building up savings that can be mobilized in the short term, it is preferable to invest in the risk-free medium of the contract, namely the fund in euros.

Second, you have to take into account taxation. Life insurance has specific taxation.

The gains produced by the contract may be subject to the income tax scale or, at the option of the taxpayer, to a flat-rate levy the rate of which decreases as the contract lasts. A withdrawal before four years results in the highest tax. It decreases during a withdrawal made between four and eight years. Beyond eight years, the subscriber benefits from an annual allowance which allows him to withdraw sums in an almost tax-exempt manner.

It should also be noted that the introduction of the One-Time Lump Sum (PFU) of 30% also applies to life insurance on earnings produced on …

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