Life insurance : the renunciation of the benefit of the contract used as an inheritance optimization tool

A life insurance contract is a financial investment with a double characteristic:

First, it is the ideal investment to build up savings for retirement or to finance various projects,
then in a second time, of a tool of optimization of preparation of the transmission of the inheritance (I let you look at the article treating of the interest of the subscription of a contract of life insurance).
Thus, as we present it to you in an exhaustive way in our new book “Life insurance and wealth management”, it is essential to pay a great attention during the subscription of the life insurance contract to release all the potential of it.

The subscriber of the life insurance contract should not only think about the supports and the yield of his contract, the legal environment of the contract (subscription mode, beneficiary clause, reinvestment clause, …) will sometimes bring a more important gain.

Unfortunately, it is too often observed that the beneficiary clause of the contract is only too rarely optimized:

Neglecting the drafting of the clause, it is the interest of the subscription of the life insurance contract that must be questioned.

How to optimize the transmission of a life insurance contract with a classic beneficiary clause.
The purpose of this post is not to go into detail about the different possible wordings, but I propose to study the solution to ensure the optimization of the beneficiary clause when it was not made before the death of the subscriber.

In more than 80% of the cases, the beneficiary clause is a “standard” clause which is written: “my spouse, not divorced nor separated from bed and board; failing that, my children, born or to be born, living or represented, failing that, my heirs.”

When faced with this non-optimized clause, at the time of the death of the life insurance policyholder, it is urgent not to do anything and especially not to ask to be paid the benefit of the contract.

Even if the insurers and bankers are sometimes in a hurry to initiate the procedures for accepting the clause and in order to carry out the replacement of the capital, it is important to carry out an audit of the estate before initiating the procedures and before freezing the operations.

The period between the death and the procedures for acceptance of the clause is short, but it is essential to take advantage of this short period to reflect with your notary or your wealth management advisor on the various solutions available to you, and in particular the renunciation of the first-ranking beneficiary.

Does the spouse, who is regularly designated as the primary beneficiary, really need this money? Wouldn’t it be more appropriate to think about passing the money directly to the children? This consideration is all the more important since the children will probably not be able to benefit from the same attractive tax treatment if they become heirs or beneficiaries as if the surviving spouse had died.

Waiver of the life insurance policy.
Upon the death of the life insurance policyholder, the beneficiary may agree to receive the insurance proceeds, but he or she may also waive them. If the beneficiary renounces the benefit of the contract, the second-ranking beneficiaries will be called upon to receive the capital (if applicable, in the case of a standard clause, the children of the deceased will be entitled to the benefit of the life insurance contract).

But beware, in the absence of a second rank beneficiary, the transmission would lose its non-inheritance character and would be part of the estate assets subject to civil law.

Let’s take an example to understand the relevance of the renunciation of the benefit of the life insurance contract:
In the case of a standard beneficiary clause: “my spouse, not divorced or legally separated; failing that, my children, born or unborn, living or represented, failing that my heirs.”

If, at the end of our estate analysis, it appears that the spouse is sufficiently protected and that he or she does not need additional capital to ensure his or her lifestyle, the spouse may waive the right to receive the capital: he or she may waive the benefit of the contract.

At the end of this waiver, the subsequent beneficiaries become the beneficiaries of the death benefit.

The latter are also free to accept or waive the benefit of the contract. If they accept, they will receive the capital of the life insurance contract under particularly favorable tax conditions. They will be able to receive up to 152500€ tax free, the excess will be taxed at a rate of 20% then 21.25€% beyond 700 000€.

In many situations, and in particular when the surviving spouse is over 70 years old when the first spouse dies, the children, heirs of the surviving spouse, benefit from an attractive tax system that they will no longer have access to if they are only beneficiaries at the death of the second spouse.

Indeed, at the death of the first spouse, the survivor will receive the insured capital. If the surviving spouse is over 70 years of age at the time of death, he or she will no longer be able to pass on to his or her heirs the benefits of the attractive tax treatment of life insurance for payments made before the subscriber’s 70th birthday. CQFD.

In the event that the children also renounce the benefit of the insurance contract, the capital will be transmitted to the third rank beneficiaries, i.e. the heirs of the insured. These are the heirs as designated in the devolution of the estate, regardless of whether or not the estate has been accepted.

A dismemberment of ownership of the beneficiary clause of the life insurance contract.
When the heirs of the succession are the spouse for the usufruct and the children for the bare ownership, the benefit of the life insurance policy will follow the same fate.

Thus, in the latter case, the beneficiary clause of the life insurance policy will be automatically split between the usufruct for the spouse and the bare ownership for the children of the insured.

While the optimization of the transmission had been completely forgotten, a precise analysis of the patrimonial situation of the beneficiaries of the life insurance contract makes it possible to optimize the transmission of the patrimony of the subscriber of the contract.