What is an Insurance Bond?

An insurance bond, also known as an investment bond, is an insurance-related investment vehicle used primarily in the United Kingdom and Australia. The insurance bond is an investment instrument offered by life insurance companies in the form of a whole life or term life insurance policy. Insurance bonds best suit investors who use them for estate planning or who are interested in long-term investing. Also, insurance bonds have some tax advantages.

Key Takeaways

  • Typically offered in the UK and Australia, an insurance bond is a whole or term life insurance policy in which remitted money is invested in funds.
  • Insurance bonds are often attractive to investors whose goals are estate planning or long-term investing.
  • Policyholders receive regular dividends or bonus payments.
  • Investors who have not taken withdrawals can receive their earnings tax-free if they hold their bonds for more than 10 years.

Understanding an Insurance Bond

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.

The creation of a bond sold to an investor comes from pooled premium funds. The company will invest the funds into equities and other securities to create a high return on investment (ROI). Holders of the insurance bond receive a regular dividend or bonus payment. Also, bonds may pay out a portion of the fund if cashed in early. Alternately, bonds may pay out on the death of the insured person, who may or may not be the purchaser of the insurance bond.

These bonds originated as a way for a company to distribute surplus funds. Today, they are a collective pool and long-term investment vehicle meant to provide financial 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.

U.K Tax Advantages of Insurance Bonds

Insurance bonds are ideal investments for long-term investors. The taxes paid on the insurance bonds generally decrease with prolonged holdings.

Investors who hold their bonds for more than ten years without making any withdrawals can receive their earnings tax-free, although different formulas determine this in different countries. 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.