What is an Insurance Bond?
An insurance bond is offered by life insurance companies that combines elements of insurance and investing. Commonly used in the U.K. and Australia, it can take the form of a whole life or term life policy while letting policyholders invest their premiums. Insurance bonds are popular in estate planning or long-term wealth building, as they offer protection and investment opportunities. One of the benefits is the potential for tax advantages.
Key Takeaways
- Insurance bonds, also known as investment bonds, are issued by life insurance companies in the U.K. and Australia.
- They are well-suited for estate planning and long-term investment strategies.
- Investors can choose funds similar to mutual funds, offered by insurance companies for long-term savings.
- Tax benefits include potential tax-free earnings if the bond is held for over 10 years without withdrawals.
- These bonds are designed to offer financial growth through regular dividends or bonus payments.
How Insurance Bonds Function
Insurance bonds are simple investments which allow investors to save for the long term. An investor may choose from funds, similar to mutual funds, offered by a life insurance company. The investment can be through a lump sum amount or regular remitted payments, as with a standard life insurance policy. The structure of insurance bonds can be as a whole life policy or a term life policy.
Bonds sold to investors are created from pooled premium funds. The company invests these funds in equities and other securities to achieve a high ROI. Holders of the insurance bond receive a regular dividend or bonus payment. Bonds may also payout part of the fund if cashed in early. Alternatively, bonds may pay out upon the insured person’s death, who might not be the bond’s purchaser.
These bonds originated as a way for a company to distribute surplus funds. Today, they are a collective pool intended for long-term growth. Creation of bonds was most common in fraternal life companies, which are similar to mutual benefit societies or other fraternal organizations. With the introduction of unitized insurance funds, which are another form of collective investment, insurance bonds have begun to be called unit-linked bonds or investment bonds.
Tax Benefits of Insurance Bonds in the U.K.
Insurance bonds are ideal investments for long-term investors. The taxes paid on the insurance bonds generally decrease with prolonged holdings.
Holding bonds for over ten years without withdrawals allows investors to get earnings tax-free, though countries differ in formulas. This ability to reduce taxes by holding the insurance bonds for longer than ten years is the main advantage of this particular investment vehicle.
Another advantage of insurance bonds is that they can be purchased either to provide long-term growth or to provide a regular income for the policyholder. This income can vary with the market, or the policyholder can buy a bond which guarantees income over the life of the insurance bond.
The Bottom Line
An insurance bond is offered by life insurance companies, mostly in the U.K. and Australia. It combines life insurance coverage with investment growth potential. These bonds can take the form of whole life or term life policies and offer notable tax benefits, particularly when held for more than 10 years, allowing policyholders to potentially earn tax-free returns. Insurance bonds are well-suited for estate planning and long-term investing, as they generate returns through investments in funds that pay dividends or bonuses to policyholders. They may provide steady income or long-term capital growth. They have evolved from traditional life insurance products into modern unit-linked bonds tied to unitized insurance funds, offering greater flexibility and transparency.