What happens to life insurance in the event of death?

With a reputation as an ideal investment product when it comes to wealth management, Luxembourg life insurance offers a range of benefits. But what happens with this insurance in the event of the holder’s death and how is the capital that is paid to beneficiaries taxed? Here are a few details.

Luxembourg life insurance

Luxembourg life insurance is an investment and wealth management product aimed at financially well-off savers. As with other forms of life insurance, the policyholder pays a premium to an insurance company, which undertakes to pay out a lump sum to one or more beneficiaries when the policy matures.

What makes Luxembourg life insurance special is that it offers great flexibility as well as a unique protection system thanks to the triangle of security and “super-privilege”. It provides access to a wide range of investment vehicles, guarantees tax neutrality for non-Luxembourg residents and facilitates international mobility. Find out more about Luxembourg life insurance.

While its advantages are obvious over the term of the policy, what happens when it is settled – in particular following the death of the policyholder?

NB: In this article, we assume that the policyholder is also the sole person listed as the “life insured” as part of the policy.

What happens to the life insurance policy following the death of the policyholder?

First, the insurance company or intermediary (the bank, for example) will need to be informed of the death. The family will normally be the one to contact the relevant organisation, but the information may also come from the beneficiary or beneficiaries, the notary in charge of the estate or the National Pension Insurance Fund (Caisse nationale d’assurance pension – CNAP).

In order to receive the capital, the beneficiary must provide a number of supporting documents (the exact documents needed may vary from one organisation to another): a death certificate (obtained from the local authority in which the life insurance policyholder died), an identity document, an affidavit if the beneficiary is not named (for example, if the policyholder has listed “my wife” or “my child” without giving their full name), the beneficiary’s bank details, etc.

Then, if no prior arrangements have been made to transfer the policy rights, the assets will be liquidated and the capital paid to the beneficiary or beneficiaries. Otherwise, if “payment in kind” is chosen, the assets will be transferred directly to the beneficiary/beneficiaries.

In most cases, life insurance policies are settled much more quickly than estates. The advantage to this is that the capital from a life insurance policy can be paid out to the beneficiary/beneficaries even before the estate has been settled.

In the event of the policyholder’s death, the sums paid to the beneficiary/beneficiaries are subject to taxation in both the policyholder and the beneficiary’s country of residence.

How is a life insurance policy taxed after death?

Throughout the lifetime of the policy, the applicable tax regime is that of the policyholder’s country of residence. In Luxembourg, no tax is levied on the payment of premiums or on the (total or partial) redemption of a life insurance policy, regardless of whether it is held by a Luxembourg resident or a foreigner.

NB: the tax treatment that is applied differs depending on the type of insurance (life insurance used as an investment product, endowment policy, retirement savings, term life insurance, outstanding balance insurance, etc.). In this article, we are focusing solely on life insurance used as an investment product.

In the event of the policyholder’s death, the sums paid to the beneficiary/beneficiaries are subject to taxation in both the policyholder and the beneficiary’s country of residence (if applicable):

• • If the policyholder was a Luxembourg resident and their beneficiary also lives in the country, the capital will be subject to Luxembourg’s inheritance tax (which varies from 0% to 48% depending on the degree of kinship and the value of the capital received).

• • If the policyholder was a Luxembourg resident but their beneficiary lives abroad, the tax legislation of both countries will apply. The beneficiary may, where applicable, have to pay inheritance tax in Luxembourg as well as tax in their own country of residence (depending on the tax rules that apply there).

• • If the holder of the Luxembourg life insurance policy resided abroad, the applicable laws will be those of the policyholder and the beneficiary’s respective country of residence (subject to existing international tax treaties).

Useful info: the insurance company will notify the Luxembourg Registration Duties, Estates and VAT Authority (AED) directly when the capital is paid to the beneficiary/beneficiaries residing in Luxembourg. Beneficiaries residing abroad will need to find out about what reporting obligations apply in that respective country.

Examples

John lives in Luxembourg. He took out a life insurance policy in the country and named his only daughter Emma as his beneficiary.

As Emma lives in Luxembourg, when John dies she will only have to pay inheritance tax on the capital she receives. Given that inheritance tax in Luxembourg is 0% on a direct descendant’s legal share, she will not have to pay anything.

Now let’s say that Emma lives in France. The life insurance capital would then be subject to inheritance tax in Luxembourg (i.e. 0% in our example) and to French tax regulations.

This example highlights the imbalance that can exist when inheritance is a cross-border affair. Let us imagine that John had two children – Emma, who is resident in Luxembourg, and Mark, who resides abroad – and that they are both equal beneficiaries of the life insurance capital. On John’s death, Emma would not have to pay anything on the life insurance capital, whereas Mark would have to pay tax on the capital received in accordance with the tax rules of his country of residence.

As a final example, let’s say that John lived in Belgium and his daughter Emma in France. On John’s death, Emma would have to pay inheritance tax in Belgium on the capital of the Luxembourg life insurance policy. Belgian inheritance tax varies according to family relationship and region of residence, with direct descendants paying between 3% and 30% in the Walloon and Brussels regions and between 3% and 27% in Flanders. She would also have to comply with French tax regulations (see box above). Although there is a double taxation treaty in place between Belgium and France, it is limited to inheritance tax and does not cover the French tax mentioned above.

While Luxembourg life insurance is an effective wealth management instrument, it is important to be aware of how the policy is settled and how the capital will be transferred to the beneficiary/beneficiaries on the policyholder’s death.

While Luxembourg life insurance is an effective wealth management instrument, it is important to be aware of how the policy is settled and how the capital will be transferred to the beneficiary/beneficiaries on the policyholder’s death. Particular care should be taken if the inheritance is to be transferred across borders, as the place of residence of both the policyholder and the beneficiary or beneficiaries will have to be taken into account. In-depth knowledge of different countries’ tax laws is therefore necessary in order to adapt the policy and avoid unwelcome surprises.

With that in mind, don’t hesitate to get in touch with a wealth manager. They will be able to provide you with more information on Luxembourg life insurance and guide you towards the most suitable solutions for your interests and requirements.