To collect the capital of your life insurance, you can opt for an exit in life annuities. This exit method consists of transforming the capital into guaranteed and regular income until your death. Before making this choice, it is nevertheless important to know how the life annuity works and is calculated.
Life annuity: definition
To fully understand the definition of a life annuity, it is first necessary to recall how life insurance works. During the life of the contract, your capital is spread over one or more supports. To recover your life insurance savings and any interest and/or capital gains generated, you have several options depending on the contract:
- carry out a full surrender to receive all of the capital and thus terminate the life insurance contract;
- carry out a partial redemption to receive part of the capital, while the remainder continues to grow;
- take out a life annuity, allowing you to regularly receive a fraction of the capital, according to a frequency defined in the contract (monthly, quarterly, or even annually), until your death;
- opt for a mixed exit, combining both a redemption of the capital and the payment of a life annuity.
If you opt for a life annuity, whether monthly or quarterly for example, you should know that this choice is final. You will receive a portion of your savings each month, until your death. In other words, you will therefore not be able to reconsider your decision, including if you ultimately need the capital. In addition, there will be no capital to pass on to your loved ones.
In life insurance, the life annuity is onerous because it is paid in return for the alienation of the capital (impossibility to reconsider your decision). It must therefore be differentiated from the life annuity free of charge, allowing you to receive an annuity without consideration. For example, it may be the sum that a parent pays until his death to a child. An important nuance to know because it has an impact on the applicable taxation.
Please note: the choice of a life annuity – whether monthly or annual, for example – is not suitable for all savers. Before opting for this mode of exit, do not hesitate to ask your adviser.
What is a joint-life annuity?
Without a contrary choice on your part, the life insurance annuity is most often irreversible. As we have seen, a sum of money will be paid to you periodically until your death and you cannot reverse your decision. When you die, the annuity ends, and no capital is paid to your heirs.
You can also agree with the insurer on another mode of withdrawal, called a joint-life annuity. Its definition and operation are relatively simple: in the event of the death of the annuitant, the sums received under the annuity will be paid to a designated beneficiary, the latter most often being the surviving spouse.
Called survivor’s pension (and not survivor’s pension), this life annuity is paid to the beneficiary of the contract until his death. However, its amount is lower than the annuity previously enjoyed by the contract holder. Why? Quite simply because the insurer undertakes to make a payment over a period longer than the life expectancy of the subscriber of the contract.
The calculation of the life annuity
To calculate the life annuity for consideration, the insurer takes into account three main criteria.
- The amount of capital: about life insurance, the calculation of the life annuity is based first of all on the amount of capital available on the contract at the time of exit. Logically, the amount of the annuity will be higher if you have a large capital on your contract.
- Your life expectancy: to define the amount of the life annuity, the mortality table is used by the insurer. Established each year by INSEE, this table indicates, for each age group, the annual probability of death of an individual. The lower your life expectancy at the time of leaving, the higher the amount of the life annuity will be. Conversely, the amount will be lower if your life expectancy is high, insofar as the pension is paid to you until your death.
- The characteristics of the annuity: to know how to calculate your life annuity, also know that the insurer will take into account other elements, specific to the terms of exit provided for in the contract. If the annuity is reversible (awarded to the beneficiary of your choice on your death) or can be revalued (possible payment of additional interest from the insurer), for example, the amount granted may be lower.
It is these different elements that make it possible to have an estimate of the life annuity and to calculate the exact amount. Do not hesitate to contact your insurer to benefit from personalized simulations.
The taxation of life annuities
In the case of an exit from life insurance as a life annuity, part of the amount received is subject to income tax, according to the rules of taxation of life annuities for consideration.
The portion of the taxable life annuity is determined from your age when you receive the first payment:
- you are under 50 on the first payment: 70% of the amount of the life annuity is then taxable;
- you are between 50 and 59 years old: 50% of the amount of the life annuity is taxable ;
- you are between 60 and 69 years old: 40% of the amount of the life annuity is taxable ;
- you are over 69: 30% of the amount of the life annuity is taxable (1).
Each year, you must file a tax return for pensions and life annuities for consideration, indicating the gross amount you received the previous year. You do not have to apply the tax deduction for the life annuity yourself: it is indeed the administration that will calculate the taxable fraction itself according to the age you were at the first payment.
To fully understand how life annuities and taxes work, let’s take the following example: you have a TMI (marginal tax rate) of 30%, the amount of your annual life annuity is €10,000 and you have benefited from the first payment at age 65.
In this example, 40% of the life annuity is subject to taxation, i.e. €4,000. Your TMI being 30%, the amount of your income tax on the life annuity received will therefore correspond to €1,200 (€4,000 x 30%).
Note: as with income tax, the amount of annual social security contributions is only calculated on the taxable portion of the pension.
The advantages and disadvantages of life annuity
Before preferring this mode of exit to the redemption of capital, it is important to know the advantages and disadvantages of the life annuity. Why? Quite simply because the annuity exit is not suitable for all projects, nor all savers.
The advantages of the life annuity in life insurance
Unlike a lump sum exit, the life annuity exit offers you many advantages:
- It allows you to benefit from an income supplement until your death, including if you live longer than what the mortality table provides. This solution is therefore interesting for supplementing your retirement pension at the end of your professional career.
- Choosing a lifetime annuity also allows you to benefit from a guaranteed amount of income. Indeed, the amounts paid to you cannot be reduced. On the contrary, the insurer is even likely to revalue the amount of the annuity. Do not hesitate to check with your insurer the conditions of revaluation.
- Leaving life insurance as a life annuity finally allows you to no longer have to manage your life insurance contract, nor to be dependent on the evolution of the financial markets. Unlike a partial redemption, the amount of your capital is indeed fixed as soon as you opt for the life annuity.
The disadvantages of the life annuity
Despite its advantages, taking out a life annuity also has certain disadvantages:
- The remainder of the annuity is not always reversible and may even be lost.
- The choice of annuity is final, so you will not be able to request a lump sum withdrawal afterward.
- The earlier the annuity is chosen, the lower the amount of the annuity is likely to be.
To make your choice, it is therefore essential to speak with an advisor. Depending on your project, your profile, and your needs, he will be able to advise you on the most suitable solution: partial redemption, full redemption, or life annuity.