What are the figures of life insurance ?
Life insurance is both ordinary and extraordinary, extraordinary because it is the preferred investment vehicle for the French. A real success with €1,785 billion in stock. This can be compared to the stock existing in the realm of Livret A, which has €444 billion in Livret A savings accounts.
It is both a success and a bit of a challenge in 2020. Since there is a decrease in collections. This decrease represents 7.5 billion euros less by the end of November 2020, according to the French Federation of Insurance Companies.
We know there is excess savings. Because in the same period, French savings amount to over €100 billion.
Why is it said that life insurance is essential in wealth management ?
It was initially founded on euro funds. But euro funds must face two major constraints:
- First, a decrease in the yield rate of the euro fund’s underlying assets. What is the euro fund? Historically, they are French bonds, whose profitability has been decreasing for over 35 years. For more than 6 years now, the returns have been below 1%, indicating a decline in profitability. The mechanical effect of the Mark-To-Model of the euro fund results in yields that are certainly positive but declining.
- Then, a second point that challenges euro funds is regulation. Notably with the European Solvency II regulation in place since 2016. Today, insurers increasingly need more capital to hold bonds in their portfolios.
What are the new strengths of life insurance ?
The basic principle of life insurance is the availability of savings. This availability means that there is no :
- No more entry fees,
- No more exit fees,
- And 100% of the capital is available before 8 years.
It is often said that the capital is not accessible before 8 years of the contract, but that is false.
The life insurance contract also offers a tax system that is very favorable, not on the rate but on the base.
For example, if a policyholder invests €100 with their insurer and the contract gains 20%. The policyholder now has a contract worth €120 and decides to withdraw 10% of the contract, which is €12.
There is a form of calculation defined in article 125-0 A of the General Tax Code: only in the case of a €12 withdrawal (i.e., 10% of the contract), the taxable base will be only €1.2. This has been reinforced since Macron’s reform (the Finance Law for 2018) which establishes a flat tax rate.
In the PACTE law, there is a 12.8% income tax, 17.2% social contributions, and 30% tax regardless of the contract’s duration, with a small extra benefit of a €9,200 deduction after 8 years.
We have restored what was legally allowed; people don’t choose life insurance just because of a favorable tax regime. The 30% tax applies immediately after payment into the contract, whereas before it was 52%, so a significant reduction.
These advantages are reinforced by the PACTE law, which aims to attract savings towards the real economy.
Why can life insurance promote the real economy and thus companies ?
This is because it is possible to make new investment vehicles or supports eligible under the contract.
The Macron law of 2015 gave the ability to include private equity securities in the contract, such as FCPA (risk-sharing mutual funds) or FPCI (professional investment funds).
This measure was strengthened with the PACTE law of May 2019, allowing inclusion of private equity via FCPA and FPCI, with up to €100,000 (10% of savings) and over €100,000 (50% of savings).
The insurer provides liquidity in case of death, along with additional benefits that are not available if investing directly in private equity, making this a key point.
Explanation about partial transfer
The other bonus is the ability to partially transfer your life insurance. Partial transfer is possible within the insurer.
For example, a policyholder has an old contract that relies solely on euro funds, which are now considered outdated. Life insurance offers this flexibility; you can transfer or upgrade your contract without affecting its fiscal interior. This avoids a total withdrawal, which would end the contract and trigger taxation, and instead enables the registration of a new product within a new contract that can include unit-linked units.
The PACTE law does not impose a minimum quota for investment in UC. At least 50% should be allocated to unit-linked units.
Should all contracts be converted exclusively into unit-linked contracts ?
It is important to keep the overall framework of life insurance; do not discard the principle that new practices are emerging.
In the past, it was easier to offer life insurance invested in guaranteed funds because there was guaranteed performance, and no advice was even necessary.
Today, advice is necessary, and wealth management advice is a fundamental driver to support this transition in French savings management.
This core principle is now reflected in the DDA (distributor insurance distribution directive), which has been regulating since October 2018.
It defines:
– the reason for management,
– risk appetite
We assess the suitability between the investment horizon, risk appetite, and:
- postpone and advise
- monitor and adjust within the contract the different unit-linked units to adapt at any moment to the situation and the investor’s wishes.
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