Livre A or life insurance: match reborn with inflation

Published on July 15, 2022, 7:00 AM

Livre A by 2%. It has been almost a decade since the price of a typical tax-exemption booklet has not reached this symbolic level. Proposed on 14 July by the Bank of France and subject to approval by the Ministry of Economy, this 1 pip increase in Livret A is not only symbolic. At 2%, its rewards exceed the 10-year OAT rate, the bond yield compass, and guaranteed capital euro life insurance funds.

In this context, is it worth it to repatriate the savings from the fund in euros to your Livret A or LDDS? Remember that the level of the Sustainability and Solidarity brochure is identical in structure to the Livre A rating.

Here are 4 points of comparison to consider when making a decision.

1. Net profit

After an annual inflation rate of 5.2% in May, the consumer price index rose 5.8% in June. In this context, raising the Livret A rate does not really change the situation: its real return, i.e. excluding inflation, remains negative at -3.8% adjusted for June inflation.

“The real profitability of Livret A has never been so low,” notes Vincent Kudkowicz, CEO of bienpré and Primaliance. Although his calculation formula takes into account rising prices, “livre A will always be late in the face of rising inflation,” continues Vincent Kudkovich. Unless there is an exception to the current rule, its rate is reviewed every 6 months, and the €STR interbank rate is also taken into account, which remains negative.

But the picture is even worse when it comes to euro-denominated funds, whose annual returns are reported to investors during the first quarter. Since euro funds are invested in bonds with very low yields for a long time, their yields have not yet been affected by the recent and sudden rise in interest rates. As a result, with an average return less management fees of 1.30% for EUR funds in 2021, there is no doubt that their average return after inflation in 2022 will be largely negative.

For Vincent Kudkowicz, this grim picture should encourage savers to be more selective in their choice of life insurance and, in particular, the proposed euro fund. He suggests giving preference to envelopes containing guaranteed funds with more dynamic pockets, for example, for so-called infrastructure projects.

Some funds are posting 2021 returns that approached or even exceeded the 2% threshold. Under legacy contracts, income bonuses paid to clients who diversify their investment vehicles can also allow the fund to earn returns in euros above 2%. But this type of solution is often reserved for clients with a very high savings capacity and outstanding liabilities invested.

2. Warranty and security

In order to invest in a completely safe vehicle, investors should check the amount of capital guarantee offered for their fund in euros. This is because more and more insurers are offering a guarantee without management fees, which could theoretically result in returns minus negative fees if bond yields fall further.

Conversely, Livret A has the double benefit of being free to the depositor and guaranteed. His remuneration, not deflated, cannot be lower than 0.50% in accordance with applicable law.

Capital Guaranteed: Intrinsic booklet quality?

Please note that the capital guarantee does not apply to all products referred to as “passbooks”. “Crypto savings accounts” invested in bitcoin, ethereum, or cryptoassets trying to replicate a common currency such as the euro or dollar borrow this totem name without offering that characteristic usually expected from savings accounts.

In the event of the bankruptcy of the financial institution where your savings accounts are held, outstanding regulated savings and life insurance balances are covered, but under different terms. Thus, deposits under Livret A, LDDS and Livret d’épargne populaire are fully guaranteed by the state (the ceiling of 100,000 euros exceeds the maximum allowable amount for these booklets).

With regard to life insurance, the Personal Insurance Guarantee Fund will reimburse up to 70,000 euros per depositor and institution in case of default. “Recently, our financial system has survived several crises and strengthened. In my opinion, there is no risk that this guarantee fund will be activated,” says Vincent Kudkovich.

But for especially concerned investors, “one solution is to enter into several contracts with different insurers in order to have a ceiling of 70,000 euros for each of them. In terms of heritage, it’s even a recommendation, because every insurer and every contract can benefit from its own interest,” insists this general manager of financial investment portals.

On the other hand, “what worries us more is the possibility introduced by the Sapin Law 2 to block withdrawals from funds in euros,” he adds. It authorizes the state, by decision of the High Council on Financial Stability, to suspend, postpone or limit buyouts or life insurance arbitrage proceedings in the event of a “serious and specific threat” to the financial system. This block can last for three months, with the possibility of renewal, but not more than six months in a row.

Is the current inflationary period and rising interest rates such a threat? “If the 10-year OAT stays consistently above 1.50% to 1.75%, life insurance will enter the risk zone,” Cyril Chartier-Castler, founder of Good Value for Money, said in Les Echo columns in late June. Since then, the 10-year bond rate has topped 2%, falling to 1.85% on July 8. The worst-case scenario is yet to come.

3. Liquidity

Barring the application of the Sapin Law 2, life insurance is a liquid envelope, contrary to the conventional wisdom that holds money on hold for 8 years. However, it usually takes a few days for your funds to be returned. The insurance code is also generous to insurers, giving them two months. “If a contracting party asks to withdraw from a contract, the insurance or capitalizing company shall pay him the redemption value of the contract within a period which may not exceed two months”, thus its article L132-21 is provided. In addition, the insurer must pay late payment penalties indexed to the statutory interest rate.

With regard to Livre A, there are no such frictions. To recover your savings, all you have to do is make a transfer to your checking account. Immediately if the final destination account and the regulated savings book are held at the same institution.

“Livret A is a pocket for unexpected expenses. Life insurance has a more property-based purpose, offering some flexibility when a saver wants to finance an important project such as a property purchase,” emphasizes Vincent Kudkovich. This refers to an advance in life insurance, which is similar to a loan provided by an insurer, the amount of which depends on the outstanding balance of its contract.

4. Taxation and succession

“If an investor is disappointed with his life insurance contract, he should not close it. Having an old contract that has reached tax maturity, even if it is poorly funded, is an asset in your assets,” Vincent Kudkovich also recalls.

In addition to the social security contributions from the euro funds collected every year, life insurance income is taxed at the moment when the contributor recovers all or part of his money. And after 8 years, interest is taxed after an annual allowance of 4,600 euros per person. Thus, it is possible to make regular payments exempt from income tax.

Thus, moving from your Eurofund to Livret A requires this tax subtlety to be taken into account so that the small additional interest received is not excluded from the possible taxation of withdrawals from the Eurofund.

The issue of timing should also be raised from the point of view of succession. Life insurance is an envelope cut to convey a legacy. Capital paid to a designated beneficiary is exempt from inheritance tax of up to €152,500 per beneficiary on payments made before the subscriber turns 70 years old. Then a fee of 20% applies up to €700,000 and then 31.25% in excess.

For premiums paid after the age of 70, death benefits are subject to inheritance tax at the applicable rate depending on the relationship between the insured and the beneficiary, but after a total discount of 30,500 euros for all beneficiaries and all contracts combined. In this sense, if an investor has an agreement to transfer his savings to heirs, it is better not to touch him, and even more so if he is approaching the age of 70.

With regard to Livret A, in the event of the death of the depositor, the amounts held in regulated savings accounts are included in the property. Thus, depending on the relationship with the beneficiary and the amounts transferred, the heir may be subject to very high inheritance tax.

Make the Right Decision

It is undeniable that in an environment of uncertainty and volatility, the increase in livre A is good news for investors who can use it to bide their time, secure their savings and find new investment opportunities.

At 2% net of taxes, Livret A’s returns are certainly below inflation, but outperform most other guaranteed investments, including most euro life insurance funds.

On the other hand, the possible arbitrage of the Eurofund in relation to Livret A should be assessed taking into account the tax term of his contract, the age of the depositor and the goal he pursues by opening life insurance.

To improve the efficiency of his life insurance, Vincent Kudkowicz, CEO of bienpré and Primaliance, is pleading to move away from classic euro funds more and invest in units of account (UC), presenting a moderate risk but potentially more profitable. In particular, he suggests investing in stone paper for units that can earn higher returns with higher rents.

Cryptocurrency booklets, competitors?

For reference, and also to evaluate this level of reward, Livret A with a 2% rate is on par with the booklet on cryptocurrencies, fiat bitcoin, released this week by Coinhouse. As a reminder, investing in a cryptocurrency that is currently in disarray is historically presented by its advocates as a more effective way than Livret A to protect their savings from inflation.