Life Insurance for Couples: Tax Optimisation Strategies

Life insurance within the couple: a powerful tax lever

Life insurance offers specific tax optimisation opportunities for couples, whether they are married, in a civil partnership (PACS), or cohabiting. The matrimonial regime, the couple's tax status, and how contracts are allocated between partners directly affect the tax paid on gains and the conditions for transferring wealth. Exploiting these levers requires a coordinated strategy between both partners.

Tax optimisation as a couple goes beyond simply doubling the allowance after 8 years. It encompasses distributing contributions between partners to stay within the 150 000 euro threshold per person, choosing between PFU and progressive scale (a joint decision for married or civil-partnered couples), planning inheritance through beneficiary clauses, and coordinating with the matrimonial regime. Each of these levers can generate significant savings when properly activated.

The three couple situations and life insurance

Tax treatment differs markedly depending on the couple's status:

• Married or civil-partnered with joint taxation: joint income declaration, allowance doubled to 9 200 euros after 8 years, shared PFU/progressive scale choice
• Married or civil-partnered with separate taxation (year of marriage/PACS by election, or legal separation): each partner has the 4 600 euro allowance and makes their own PFU/progressive scale choice
• Cohabiting (unmarried) partners: two separate tax households, each with a 4 600 euro allowance and complete freedom of tax choice

The example of Emilie and Julien, aged 45 and 48, married couple

Optimising withdrawals for married or civil-partnered couples

The doubled allowance of 9 200 euros

The main tax advantage for married or civil-partnered couples with joint taxation is the doubling of the allowance after 8 years: 9 200 euros of gains exempt from income tax each year, compared to 4 600 euros for a single person.

This allowance is annual, meaning it renews each calendar year. A patient couple can therefore extract tens of thousands of euros of gains without paying a cent of income tax, by spreading their withdrawals over time.

5-year extraction strategy: A couple can withdraw up to 9 200 euros x 5 = 46 000 euros of gains exempt from income tax over 5 years. For a contract with a gains-to-value ratio of 30%, this corresponds to a total withdrawal of 46 000 / 0.30 = approximately 153 000 euros with no income tax (only 17.2% social charges remain payable).

Allocating withdrawals between partners

If each partner holds a contract over 8 years old, withdrawals can be distributed across both contracts. The 9 200 euro allowance applies globally to the tax household, regardless of whether the withdrawals come from one or several contracts.

However, this allocation becomes strategically interesting when the contracts have different gains ratios. By prioritising withdrawals from the contract with the highest gains-to-value ratio, you maximise the amount of gains covered by the allowance for any given withdrawal amount.

Conversely, if the goal is to withdraw as much cash as possible with minimal taxable gains, you should prioritise the contract with the lowest gains ratio.

The 150 000 euro threshold: an advantage per person

Principle

The 150 000 euro contribution threshold, above which the rate rises from 7.5% to 12.8% for contracts over 8 years old (post-27/09/2017 contributions), is assessed per taxpayer and not per tax household. A married couple therefore has a combined threshold of 300 000 euros (150 000 euros each).

This threshold is calculated across all life insurance contracts held by the same person, regardless of the insurer. Contributions made before 27/09/2017 are excluded from the calculation.

Contribution allocation strategy

For a couple with 280 000 euros to invest in life insurance:

Poor strategy: putting everything into a single contract in one partner's name

• 150 000 euros at the 7.5% rate and 130 000 euros at the 12.8% rate

Good strategy: splitting between two contracts (one per partner)

• Partner 1: 140 000 euros (< 150 000 euros, 7.5% rate)
• Partner 2: 140 000 euros (< 150 000 euros, 7.5% rate)

The savings can be significant. On 130 000 euros of contributions shifting from 12.8% to 7.5%, for gains of 20 000 euros corresponding to this bracket, the income tax saving would be 20 000 x (12.8% - 7.5%) = 1 060 euros. Over the life of the contract, with growing gains, this saving compounds year after year.

Optimisation for unmarried cohabiting partners

Two separate allowances

Since cohabiting partners are separate tax households, each benefits from their own 4 600 euro allowance. The total is 9 200 euros, identical to a married couple. However, management is more flexible: each partner can independently optimise their choice between PFU and progressive scale.

Different marginal tax rates: a potential advantage

If the two partners have different TMIs, they can each adapt their strategy independently. The partner with the lower TMI benefits from opting for the progressive scale, while the one with a high TMI keeps the PFU.

Example:

• Partner A: 11% TMI, life insurance gains of 3 000 euros, also receives 2 000 euros in dividends
• Partner B: 30% TMI, life insurance gains of 3 000 euros, also receives 5 000 euros in dividends

Partner A opts for the progressive scale:

• Life insurance gains: 3 000 x 11% = 330 euros income tax (vs 384 euros under PFU)
• Dividends (after 40% allowance): 1 200 x 11% = 132 euros income tax (vs 256 euros under PFU)
• Total: 462 euros (vs 640 euros under PFU, saving of 178 euros)

Partner B keeps the PFU:

• Life insurance gains: 3 000 x 12.8% = 384 euros income tax (vs 900 euros under the progressive scale at 30%)
• Dividends: 5 000 x 12.8% = 640 euros income tax (vs 3 000 x 30% = 900 euros under the progressive scale after 40% allowance)
• Total: 1 024 euros (vs 1 800 euros under the progressive scale, saving of 776 euros)

A married couple does not have this flexibility since the 2OP option applies jointly to the entire tax household. This is one of the rare tax advantages of cohabitation for life insurance purposes.

The major disadvantage of cohabitation: inheritance

While cohabiting partners benefit from tax flexibility on withdrawals, they are heavily penalised for inheritance purposes. On death, the surviving partner named as beneficiary of the life insurance is subject to 60% taxation on the transferred capital (after the 152 500 euro allowance per beneficiary for contributions made before age 70). Marriage or PACS entirely eliminates this taxation thanks to the surviving spouse exemption.

Joint subscription (co-souscription): advantages and limitations

How it works

Joint subscription is available only to couples married under the community property regime (communaute). Both spouses are co-holders of the contract. The joint subscription can provide for settlement on the first or the second death.

Settlement on the first death

The contract is settled on the death of the first spouse. The surviving spouse receives the contract value as beneficiary, with total exemption from inheritance tax (TEPA law 2007) and from the Article 990 I levy.

Settlement on the second death

The contract continues for the benefit of the surviving spouse after the first death. Settlement occurs only on the second death, for the designated beneficiaries. This option allows:

• Preserving the contract's tax seniority for the surviving spouse
• Letting the surviving spouse access the funds and make withdrawals
• Optimising the transfer to children on the second death, benefiting from the 152 500 euro allowance per beneficiary

The beneficiary clause between partners

Total exemption for the surviving spouse

It bears repeating that the surviving spouse (married or civil-partnered) is totally exempt from inheritance tax and from the Article 990 I levy. Naming the spouse as sole beneficiary of a life insurance contract therefore has no direct tax benefit in terms of inheritance: the exemption already exists as of right for standard succession purposes.

The optimal strategy: splitting the beneficiary clause (demembrement)

Rather than naming only the spouse, a split beneficiary clause allocates:

• Usufruct (or quasi-usufruct) to the surviving spouse: they have free use of the funds
• Bare ownership (nue-propriete) to the children: they hold a claim for restitution

The spouse has free use of the funds (quasi-usufruct), and on the second death, the children hold a claim for restitution deductible from the surviving spouse's estate. Each child benefits from the 152 500 euro allowance on the capital transferred by the first deceased (for contributions made before age 70).

Worked example:

Monsieur Duval dies at age 72. His 400 000 euro life insurance policy (contributions made before age 70) is split between Madame Duval (quasi-usufruct) and their two children (bare ownership).

• Madame Duval receives 400 000 euros in quasi-usufruct: 0 euros levy (spouse exemption)
• Each child has bare ownership of 200 000 euros
• Allowance of 152 500 euros per child: taxable base = 200 000 - 152 500 = 47 500 euros
• Levy: 47 500 x 20% = 9 500 euros per child
• On Madame Duval's death: restitution claim of 400 000 euros deductible from her estate, reducing the inheritance tax base on the second death accordingly

Matrimonial regime and life insurance

Communaute legale (community of acquests)

Contributions made with joint funds feed a contract that remains the personal property of the subscriber (Praslicka case law, Cass. civ. 1st, 31 March 1992). However, in the event of divorce, compensation (recompense) may be owed to the community for premiums paid with joint funds. Valuing this compensation can lead to complex discussions.

Separation de biens (separation of property)

Each spouse fully owns their own contracts. Distributing contributions between the two spouses is a direct optimisation lever, particularly for the 150 000 euro threshold. But be aware: each spouse can only fund their contract from their own income and savings.

Communaute universelle (universal community)

All assets are joint. On death, if the full attribution clause is included, the entire estate passes to the surviving spouse without inheritance tax. This configuration can limit the usefulness of life insurance for inheritance on the first death, but it remains relevant for the transfer on the second death (to the children).

The PFU / progressive scale choice for married couples

The choice between PFU and the progressive scale is a joint decision for married or civil-partnered couples with joint taxation. It is exercised via box 2OP on form 2042 and applies to all investment income of the tax household.

This all-or-nothing nature can create difficult situations when the two partners have different investment profiles. For example, if one primarily receives dividends (advantaged by the progressive scale thanks to the 40% allowance) and the other receives bond interest (advantaged by the PFU), the optimal choice must be calculated based on the overall balance.

Practical rule for couples:

• If the household's TMI is 0% or 11% and investment income consists mainly of dividends or life insurance gains: opt for the progressive scale
• If the household's TMI is 30% or above: keep the PFU in the vast majority of cases
• When in doubt, run two simulations on impots.gouv.fr (with and without box 2OP ticked)

Action plan for couples

To optimise life insurance taxation as a couple:

1. Open a contract in each partner's name as early as possible to lock in the tax clock and start the 8-year countdown
2. Allocate contributions to stay below the 150 000 euro threshold per person (i.e. 300 000 euros total for the couple)
3. Coordinate withdrawals to fully exploit the 9 200 euro allowance each year, prioritising the contract with the gains ratio most favourable to the objective
4. Adapt the beneficiary clause: consider splitting (usufruct to spouse, bare ownership to children) to optimise the transfer across two generations
5. Simulate the PFU/progressive scale choice taking into account the household's overall tax position and all investment income from both partners
6. For unmarried partners: exploit the possibility of individualised tax choices (PFU for one, progressive scale for the other), but consider marriage or PACS to optimise inheritance
7. Check consistency with the matrimonial regime: under separation of property, ensure each partner funds their contract from their own resources

Life insurance offers couples considerable tax optimisation opportunities, both for ongoing withdrawal management and for wealth transfer. A coordinated strategy, adapted to the matrimonial regime and each partner's tax situation, makes the most of this wealth-planning tool. The stakes grow with the amounts involved: on a 300 000 euro life insurance portfolio, the cumulative savings from a well-crafted strategy can amount to tens of thousands of euros over the holding period.