Life and unemployment insurance: who is exempt from income tax?

In the event of job loss, you can terminate all your life insurance contracts without paying a penny of tax on the gains made, whatever their amount! The conditions to be met to take advantage of an exemption that is too often overlooked.

Proceeds from life insurance contracts are in principle subject to income tax when the contract is unwound or on the occasion of a partial surrender. A total tax exemption can however be obtained in specific exceptional circumstances of which the dismissal forms part.

To meet your expenses, you can decide to close your contract and recover your capital and capitalized interest (regardless of their amount) without going through the “Tax” box. However, you will have to pay social security contributions. In order not to wrongly claim this exemption, it is imperative to ensure that you meet the draconian conditions required by the tax authorities.

Le Revenu explains to you in practice how to safely take advantage of this little-known exemption which can allow you to go through a difficult break before finding a job.

A dismissal, but not a resignation or the end of a CDD

The legislator has provided that in the event of an accident in life, such as a dismissal for example, you can close a life insurance contract by limiting the taxation of your earnings to social security contributions only. Article 125-0 A of the CGI and the currently applicable BOI instruction (BOI-RPPM-RCM-10-10-80 §100 of December 20, 2019) referring to the “denouement” of the contract, a partial redemption following a dismissal is therefore not covered by this exemption.

This tax exemption applies regardless of the duration of the life insurance contract and even if this unemployment situation concerns your spouse or partner bound by a PACS. As a result, you can liquidate life insurance in your name tax-free if your spouse or partner has been made redundant. But such a tax exemption is subject to many conditions that must be respected.

First, you must be deprived of your job for reasons beyond your control. This assumes that you have been dismissed by your employer for whatever reason (economic, fault, etc.). Termination of the employment contract cannot result from a mutual agreement with your employer. Consequently, if you are unemployed following a conventional termination of your employment contract, you cannot benefit from the exemption applicable in the event of dismissal. (Rep.minist.Fouché n°14137 of January 28, 2016 taken from the BOI).

You also cannot take advantage of it if you have taken the initiative to break your employment contract by resigning. In addition, the end of a fixed-term contract (CDD) or the revocation of a corporate office, which do not constitute a dismissal, do not give right to exemption. (BOI-RPPM-RCM-10-10-80 §103 of December 20, 2019).

Note that if you are a merchant, craftsman or liberal professional you can also claim this exemption but only if you yourself (or your spouse or partner in a PACS) have ceased your self-employed activity following a court-ordered liquidation judgment. Here too the text is strictly applied. You cannot claim the exemption if you have voluntarily stopped your activity.

Finally, the settlement of a life insurance contract following your early retirement or your disability (or that of your spouse or partner in a PACS) also allows you to claim this exemption (in the event of disability, the exemption applies to income tax and social security contributions).

A specific deadline to act

The exemption applies to income received until the settlement of the contract provided that this settlement occurs before the end of the year following that of the dismissal.

Example : If your dismissal took place in May 2022, your earnings will only escape taxation if you liquidate your life insurance contract no later than December 31, 2023. Otherwise, the tax authorities will be entitled to estimate that the closure of your contract is not motivated by your dismissal and your earnings will be taxed under the usual conditions.

Moreover, the exemption only applies if you are registered as a job seeker with Pôle Emploi and have not found a job before the end of the period for which you are claiming exemption, under penalty of to lose the benefit (Rep.minist.Marleix n°97715 of April 3, 2012 taken over by the BOI).

Therefore, in our example, you must ensure that the outcome occurs before you have signed a new employment contract and no later than December 31, 2023.

Optimize your buyback

If you hold several life insurance contracts, the exemption applies even if you decide to terminate them all. But if you don’t need that much cash, you need to think carefully before deciding which one to redeem. In particular, you have an interest in liquidating the contract that generated the most significant gains or the one that would suffer the heaviest taxation in the event of redemption.

Also pay attention to the tax option to be exercised when carrying out your redemption transaction. If your winnings are attached to payments made until September 26, 2017, you should exclude the option for the flat rate withholding tax of 7.5%, 15% or 35% (this option is irrevocable) in order to benefit from exemption.

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