Partial Withdrawal from Life Insurance: How Tax Is Calculated

Partial withdrawals: how they work for tax purposes

A partial withdrawal (rachat partiel) means taking out part of the funds from your life insurance contract while keeping it active. Contrary to a common misconception, it is not the entire amount withdrawn that is taxed, but only the portion of gains (or income) included in the withdrawal. This rule, set out in Article 125-0 A of the Code General des Impots, is one of the major advantages of life insurance compared to other investment wrappers.

The partial withdrawal is the most common transaction carried out by life insurance holders. According to data from France Assureurs, partial withdrawals account for approximately two-thirds of all withdrawals from life insurance contracts each year, far ahead of full surrenders. This preference is easily explained: a partial withdrawal allows you to access cash while preserving the contract's tax seniority and continuing to grow the remaining capital.

Why only part of the withdrawal is taxed

Each partial withdrawal comprises two components:

• A capital portion (the original contributions recovered): not taxable, since this is the return of amounts that were already subject to income tax when they were earned
• A gains portion (the accumulated interest and capital gains): taxable, since these are earnings that have never been taxed

The tax issue therefore lies in precisely determining the portion of gains included in the withdrawal. The more gains the contract contains relative to contributions, the higher the taxable portion will be.

The formula for calculating the taxable portion

The taxable portion of a partial withdrawal is determined by a regulatory formula set by the tax authorities (BOFiP-RPPM-RCM-20-10-20-50):

Gains portion = Withdrawal amount - (Total contributions x Withdrawal amount / Total surrender value of the contract)

This formula can also be written as:

Taxable gains = W - (C x W / SV)

Where:

• W = partial withdrawal amount
• C = total contributions made (net of previous withdrawals)
• SV = total surrender value of the contract before the withdrawal

Intuitive understanding

The ratio C/SV represents the proportion of capital in the contract. By multiplying this ratio by the withdrawal amount, you get the capital portion returned. The difference from the total withdrawal amount gives the taxable gains portion. The more capital gains the contract has generated (high SV relative to C), the larger the gains portion in each withdrawal will be.

The formula can also be expressed differently: Taxable gains = W x (1 - C/SV), which highlights that the rate of gains in the withdrawal is directly linked to the ratio of capital gains in the contract.

Detailed worked examples

The example of Sylviane, 59, school headmistress

Example 2: recent contract with few capital gains

Monsieur Bernard contributed 50 000 euros to his life insurance 5 years ago. The contract is now worth 55 500 euros. He wants to make a partial withdrawal of 10 000 euros.

Calculating the gains portion:

• W = 10 000 euros
• C = 50 000 euros
• SV = 55 500 euros

Taxable gains = 10 000 - (50 000 x 10 000 / 55 500) Taxable gains = 10 000 - 9 009.01 Taxable gains = 990.99 euros

Of the 10 000 euros withdrawn, only 990.99 euros will be subject to tax.

Taxation under the PFU (contract under 8 years):

• Income tax: 990.99 x 12.8% = 126.85 euros
• Social charges: 990.99 x 17.2% = 170.45 euros
• Total: 297.30 euros, an effective tax rate of 3% on the amount withdrawn

This example shows that a recent contract, with a modest gains ratio, incurs very low taxation on partial withdrawals.

Example 3: high-performing contract over 8 years old (married couple)

Monsieur and Madame Petit (married, joint taxation) contributed 120 000 euros to a contract opened 15 years ago. The contract is now worth 210 000 euros. They withdraw 40 000 euros.

Calculating the gains portion:

• W = 40 000 euros
• C = 120 000 euros
• SV = 210 000 euros

Taxable gains = 40 000 - (120 000 x 40 000 / 210 000) Taxable gains = 40 000 - 22 857.14 Taxable gains = 17 142.86 euros

Applying the allowance (couple, contract > 8 years):

• Allowance: 9 200 euros
• Taxable base after allowance: 17 142.86 - 9 200 = 7 942.86 euros

Taxation under the PFU (contributions ≤ 150,000 euros):

• Income tax: 7 942.86 x 7.5% = 595.71 euros
• Social charges: 17 142.86 x 17.2% = 2 948.57 euros
• Total: 3 544.28 euros

Example 4: withdrawal after successive contributions and withdrawals

Monsieur Garnier has carried out the following transactions:

• Initial contribution: 40 000 euros
• Additional contribution: 20 000 euros
• First partial withdrawal: 15 000 euros (of which 3 000 euros were gains)
• Current contract value: 75 000 euros
• New desired partial withdrawal: 20 000 euros

For the calculation, net contributions mean contributions minus the capital portion of previous withdrawals:

• Total gross contributions: 60 000 euros
• Capital portion of previous withdrawal: 15 000 - 3 000 = 12 000 euros
• Net contributions (C): 60 000 - 12 000 = 48 000 euros

Taxable gains = 20 000 - (48 000 x 20 000 / 75 000) Taxable gains = 20 000 - 12 800 Taxable gains = 7 200 euros

The impact of the contract's age

The contract's age affects the tax rate applicable to gains:

The annual allowance of 4 600 euros (single) or 9 200 euros (married or civil-partnered couple) applies only to contracts over 8 years old, before calculating income tax. Social charges of 17.2% are always calculated on the full gains, without any allowance.

Strategies for optimising partial withdrawals

1. Spread withdrawals over several years

The 4 600/9 200 euro allowance is annual and applies to all gains withdrawn during the year, across all contracts combined. By spreading withdrawals over several tax years, you can benefit from the allowance each year and significantly reduce the overall tax burden.

Example: Rather than withdrawing 60 000 euros of gains in one go, Monsieur and Madame Leclerc (married) spread their withdrawals over 4 years at 15 000 euros of gains per year. Each year, the 9 200 euro allowance applies, giving a total exemption of 36 800 euros instead of 9 200 euros.

Calculating the income tax saving:

• Single withdrawal: (60 000 - 9 200) x 7.5% = 3 810 euros income tax
• Spread over 4 years: (15 000 - 9 200) x 7.5% x 4 = 1 740 euros income tax
• Saving: 2 070 euros (not counting the time value of money)

2. Calibrate the withdrawal amount to stay within the allowance

Using the calculation formula, you can determine the exact withdrawal amount that keeps gains within the allowance threshold. For a single person with a contract over 8 years old:

Optimal withdrawal = Allowance x SV / (SV - C)

If SV = 180 000 euros and C = 100 000 euros: Optimal withdrawal = 4 600 x 180 000 / 80 000 = 10 350 euros

This 10 350 euro withdrawal generates exactly 4 600 euros of gains, fully covered by the allowance. No income tax will be due. Only social charges of 17.2% will apply to the 4 600 euros of gains, amounting to 791.20 euros.

For a married couple, the optimal withdrawal is: 9 200 x 180 000 / 80 000 = 20 700 euros per year.

3. Make the withdrawal at year-end

Withdrawals made at year-end offer several tactical advantages:

• You know precisely your other investment income received during the year and can make an informed choice between PFU and progressive scale when filing your return
• You can adjust the withdrawal amount to optimise use of the allowance
• If you have already used up the allowance with other gains during the year, it may be better to postpone the withdrawal to January of the following year

4. Prioritise withdrawals from the least profitable contracts

If you hold several contracts, make your withdrawals first from the one with the lowest gains-to-value ratio. This way, you withdraw more capital (not taxable) and fewer gains (taxable) for the same amount withdrawn.

Example:

• Contract A: 50 000 euros contributed, value 80 000 euros (gains ratio 37.5%)
• Contract B: 50 000 euros contributed, value 60 000 euros (gains ratio 16.7%)

A 10 000 euro withdrawal from Contract B generates only 1 667 euros of taxable gains, compared to 3 750 euros from Contract A. The income tax saving can be significant.

5. Combine partial withdrawals with additional contributions

An advanced strategy involves making additional contributions before a partial withdrawal to dilute the proportion of gains in the contract. Caution: this technique must be used carefully, as the tax authorities could reclassify it as an abuse of rights if it is manifestly artificial. A reasonable delay between the contribution and the withdrawal (a few months) is recommended.

Choosing between PFU and the progressive scale

Partial withdrawals are not exempt from the question of choosing between the PFU and the progressive income tax scale. Remember that this choice is global: it applies to all investment income received during the year (dividends, interest, securities capital gains, life insurance gains). It is exercised by ticking box 2OP on the 2042 tax form.

Practical rule: If your TMI is 0% or 11%, the progressive scale is generally advantageous for withdrawals from contracts under 8 years old (11% < 12.8%). For contracts over 8 years old, the PFU at 7.5% regains the advantage as soon as the TMI exceeds 7.5% (which is the case from the 11% bracket).

Points to watch

A few important points to keep in mind:

• The calculation formula is applied by the insurer, who provides the summary IFU
• Social charges apply to the full gains, without any allowance
• After a partial withdrawal, the contract remains open and continues to benefit from its tax seniority
• The insurer deducts an income tax advance (12.8% or 7.5%) at the time of withdrawal, adjusted when the tax return is filed
• The processing time for a partial withdrawal is generally 1 to 3 weeks depending on the insurer (online contracts are often faster)
• Some contracts require a minimum partial withdrawal amount (often 500 or 1 000 euros) and a minimum balance to maintain on the contract after the withdrawal

The partial withdrawal is the preferred tool for accessing funds while preserving the tax advantages of life insurance. By mastering the calculation formula and planning withdrawals methodically, savers can considerably reduce their tax burden and optimise their long-term wealth management.