The Britains save a large part of their income. In the order of 15% on average.
Despite this high savings rate, British savers have a rather poor knowledge of the savings products available to invest their savings effectively.
For example, life insurance is one of the most interesting ways to invest your money and many of you are wondering how life insurance works.
In this article, we take stock of how this savings product works, which is also a nice tax niche.
First of all, don’t confuse it with death insurance: life insurance is a savings product.
Moreover, you can withdraw your invested money whenever you want, your money is not blocked.
1. Products that can be accommodated in life insurance
Life insurance is a package within which the individual investor can invest in a wide variety of financial products: secured euro funds, or units of account (equity funds or real estate funds).
In practice, British savers are highly risk-averse and turn to the most popular products and more secure.
For this reason, savers are turning massively to euro-denominated funds.
For example, 80% of the capital invested in life insurance policies is directed into Euro funds.
I recommend the life insurance, which is ranked among the best performing and cheapest. Tested and approved by me for several years!
The advantage of euro funds is that the capital invested is 100% guaranteed. These funds are managed by insurers.
Technically, euro funds are very essentially made up of bonds of large European states (France, Germany, etc.), offering significant guarantees and a virtually zero risk of default.
The units of account
Life insurance is not just about euro funds. Indeed, for investors wishing to boost their portfolios, it is possible to invest in more volatile products (risk of a downward trend in the value of financial products) but also more remunerative in the long term: units of account.
For example, it is possible to hold units in investment funds or real estate investment companies.
(SCPI) within the life insurance contract. These products offer higher returns than euro-denominated funds.
On the other hand, there is a risk of capital loss, and these unit-linked investments can be envisaged over the long term.
2. Why choose life insurance to invest your savings?
The access to a large choice of financial products and the return, as mentioned in the previous paragraph, cannot justify by themselves such a craze for life insurance.
The major advantage of life insurance lies in its particularly advantageous tax treatment.
The tax advantages are available in several ways.
Taxation of life insurance gains
One important point concerns the taxation of capital gains on withdrawals from life insurance.
As soon as the insurance contract is more than 8 years old, the saver can make a withdrawal with reduced taxation on the capital gains portion.
In concrete terms, the saver benefits from an annual allowance of 4,600 GBP on taxable capital gains. This allowance is doubled for a married couple (9,200 GBP).
If the saver withdraws money before the 8-year term of the contract, the gains are subject to the taxation that applies by default to capital gains. The choice is between a single lump-sum deduction (PFU) at a rate of 30% or taxation according to the income tax scale.
After 8 years, if the share of capital gains exceeds 4,600 GBP in the year of withdrawal (or redemption), a reduced rate of 24.7% applies on the gains, only for gains from the investment of capital less than or equal to 150,000 GBP (for the share of capital invested above this amount, the PFU of 30% applies).
This taxation is very interesting for retirees who wish to receive a pension supplement in the form of an annuity on the capital invested in a life insurance policy.
Life insurance is also interesting for young working people wishing to make a contribution to finance the purchase of a principal residence. A great classic in the patrimonial path of individuals.
Indeed, funds in euros are currently the best solution for building up capital in complete security with a return well in excess of inflation. The best euro-denominated funds offer returns close to 3%, while regulated savings accounts offer net returns below inflation (0.75% for the Livret A).
Take date on life insurance
In order to take full advantage of the favourable tax treatment of life insurance, it is in the interest of investors to open a policy as early as possible in their lives, which is known as “taking a date”.
Good point: it’s the opening date of the contract and not the payment date that is used to track the age of the contract and benefit from reduced tax rates on withdrawals. It is possible to open a life insurance policy with an initial capital of 100 GBP.
The estate advantage of life insurance
The second major tax benefit of life insurance: if you pay in before your 70th birthday, you will be able to pass on 152,500 GBP per beneficiary without them having to pay a single euro in income tax.
In fact, life insurance is deemed to be outside the scope of inheritance, which makes it one of the largest tax niches in France.
3. How to choose your life insurance?
It is necessary to know how to turn to the right intermediary and choose your life insurance, because the choice is plethoric!
You can consult the rankings of the best life insurance companies, for example here.
Find the right intermediary
Savers intending to open a life insurance policy generally turn to their bank. The vast majority of banks offer life insurance policies. But they are not the only ones to offer this service.
It is also possible to go through a specialized broker to take out a policy. On this subject, it should be noted that in recent years new online brokers have appeared on the Internet.
These brokers offer life insurance policies that are particularly advantageous in terms of operating costs, services and accessible financial products.
As mentioned above, I recommend the life insurance of online bank, which has been ranked among the most efficient and least expensive for several years.
In addition, you can open a life insurance policy under free management (and invest freely between euro and units of account) or managed (with management mandate according to your profile).
So compare carefully!
Compare the fees and performance of euro and unit-linked funds.
Fees are one of the critical points to look at when comparing different life insurance policies.
There are different types of fees.
First, there are front-end fees, also known as “payout charges”. These are fees that are applied to the capital invested. In practice, the best contracts do not have payout charges.
Secondly, there are management fees applicable to unit-linked products (unit-linked products are investments other than euro-denominated funds). You should be aware that unit-linked management fees may go down to 0.50% for the best life insurance.
There are also arbitration fees (between unit-linked and euro funds). Here again, they can be free of charge or paid according to the contract.
As far as the product offer is concerned, if you wish to invest in units of account (equity or real estate funds), remember to check whether the accessible units of account meet your expectations.
Moreover, the performance of euro funds will not be known in advance, but the performance of past years can tell you whether the fund is optimally managed or not, so take a good look at the performance history of euro funds.
The choice of life insurance policy is a very important point and it is best to look for the best life insurance policies. It is important to know that it is not possible to transfer a contract. On the other hand, you should know that it is possible to hold several life insurance policies.
This article is now finished, I warmly thank the Investors’ Avenue site for its writing and its very clear explanations on “how life insurance works”.
Don’t forget that you can earn Igraal cashback even on life insurance! For example at the moment, for the opening of a Bank life insurance policy (also very well ranked), Igraal pays you 80 GBP.