What are Insurance Bonds?

Insurance bonds are a good investment choice worth looking at because in certain situations they can lower personal tax liability or increase entitlement to some welfare benefits.

An insurance bond is a special type of life insurance policy that is structured to be a single premium policy. A lump sum insurance premium is put in and returned at the end of the term (or upon the death of the policy owner, whichever occurs first), together with profits (after deducting entry cost and management fees).

This is unlike the life insurance policies where a fairly small premium is paid to cover against an adverse event.
 

The Advantages of Insurance Bonds


As the investment originates from the life insurance protection, the rise in the value of the initial payment is viewed as a tax-paid profit, instead of taxable income. Because of this the insurance bonds are most suitable for people on high marginal income tax rates. Obviously, if a person's marginal tax rate is more than the life insurer's then there is a relative edge.

Income means tested beneficiaries can also find the insurance bonds appealing as the profits are recognized as capital instead of income. The "tax-paid" feature of the earnings is responsible for some misunderstandings in the industry. "Tax-paid" should never be wrongly identified as "tax-free".
 

Insurance Bond Categories


The money paid into an insurance bond is monitored by a fund manager in much similar to a mutual fund. Insurance bonds fall under one of two categories: they can be market linked or guaranteed.

Guaranteed funds invest primarily in money market deposits and interest bearing stock. These are typically ideal for safety conscious investors. The guarantee normally refers to the capital not the earnings, which fluctuate depending on the overall interest rate movements.

Market linked insurance bonds are similar to balanced funds in that the base of investment is spread over various markets at the discretion of the fund manager. They neither carry performance nor capital guarantees and the earnings are directly linked to the overall performance of the investment markets.
 

The Security Levels of Insurance Bonds


There isn't any guarantee regarding the security of the funds, nevertheless life insurance providers are closely governed, the investments are often very safe. A variety of security choices can be decided on by mixing and matching the different combinations of fixed and managed funds.

Even with a "term", part or all the investment can be withdrawn whenever you want, but the entry and/or exit fee structure of the fund may affect this.

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