Capitalisation policies: definition & functioning

What are the characteristics of the capitalisation contract and its use?

Definition and functioning of capitalisation policies

What is a capitalisation policy?

Capitalisation policies are often compared with life insurance policies, but their uses differ and the way they operate is quite distinct.

First of all, capitalisation policies do not have an insured, and do not enable a beneficiary clause to be set up. 

In fact, only two parties will be involved: 

• the insurer; 
• the policyholder.

The policyholder's heirs will not become parties to the policy until the day of the policyholder's death, when the capitalisation policy will be transferred to them.

Moreover, when a capitalisation policy is transferred to the heirs, there will be no tax advantage to be gained because capitalisation policies are considered to be an estate asset and form part of the deceased’s estate. 

However, the classic legal advantages to the estate in terms of succession in the event of intestacy may be applied, depending on the policyholder's place of residence on the day of his death and the family relationship between the deceased and his heirs.

How do capitalisation policies work in terms of investment?

Capitalisation policies, as they are known in most European countries (France, Belgium, Luxembourg, etc.) are savings products and can invest in funds denominated in euros and/or units of account. It enables investment in various investment vehicles (UCITS, shares, bonds, unit trusts, etc.) according to the rules stated by the Commissariat aux Assurances.

Policyholder: legal entity / individual 

Why should a legal entity take out a capitalisation policy

Capitalisation policies may be taken out by a legal entity in compliance with the mandatory local rules of each country and regardless of its tax system, provided that its corporate objects permit it to take out such a policy. The objectives can be :

• optimise the transfer of inherited assets to the heirs ; 
• optimise the management of the company's cash flow.

Why should an individual take out a capitalisation policy?

There are several reasons why capitalisation policies should be taken out by individuals :

• to increase the value of a lump sum ;
• to benefit from the wide range of investment vehicles ;
• to transfer assets. 

Advantages and disadvantages of capitalisation policies

Capitalisation policies make it possible to meet different and varied needs, always depending on the policyholder's place of residence. Account should be taken of any differences concerning capitalisation policies in all markets where it is proposed and used.

The main advantages of capitalisation policies :

• Subscription by a legal;
• Subscription by an individual;
• Portability of the policy; 
• Transferability free of charge: by donation or inheritance;
• Wide-ranging choice of investments vehicles; 
• Collateralisation of the policy.

The main disadvantages of capitalisation policies :

• No insured and no beneficiary clause;
• Inheritance tax is applicable in the event of the policyholder's death in certain countries;
• The taxation applicable in the event of surrender is more or less onerous, depending on the policyholder's country of residence.