What exactly are insurance investment bonds?
An investment insurance bond is a type of investment fund that is offered by insurance companies. an investment insurance bond acts like a life insurance policy that provides a simple, tax-effective investment. Essentially, it's an investment-only contract that features a small amount of life cover to be paid in addition to the surrender value (which is equal to the account balance). The insurance paid may be represented as a percentage of the account value.
What does types of investments are made?
Bonds are generally one-off investments at an agreed interest rate for a defined period of time, paying the lender interest at regular intervals. There are some insurance companies that will allow the lender to make additional investments. It is up to the policyholder to decide how much balance to invest and they have the opportunity to choose from a range of investment options including;
- Capital guaranteed
- International shares
A small percentage of the premium is deducted from the bond as a fee to the insurance company.
How is an insurance bond different to life insurance?
There are similar rules to life insurance
Investment bonds, otherwise known as insurance bonds, are technically life insurance policies under the Life Insurance Act 1995, which require a nomination of the Life Insured and beneficiaries.
- Insurance bonds are investments. While insurance bonds have a life insurance component, they are generally treated as investment vehicles with a focus to create wealth. Insurance bonds are also only available through certain providers.
- Pure life insurance won't grow like an investment. Life insurance will safeguard your dependents with a lump sum value if you pass away. However, you won't be able to sell it like an investment.
Who provides insurance investment bonds?
Some Australian insurance providers and financial institutions that offer insurance investment bonds include:
- Commonwealth Bank/Comminsure
Who should consider investing in insurance bonds?
Insurance bonds may be suitable for:
- Parents and/or grandparents who are looking to invest on behalf of their grand/children
- Children from 10 to 16 years old can invest with their parent's/guardian's consent
- Investors who are looking for long-term (more than 10 years) investment avenue
- Individuals who have a tax rate higher than 30%
- Investors who are not working and have never entered in the workforce as they can't access superannuation
- Individuals between the age of 65 and 74 who do not currently meet the superannuation work test
- Low income earners and pensioners who are looking to increase their eligibility for income-tested tax offsets
- Individuals who do not need regular income
What are some benefits of investment insurance bonds in Australia?
1. Tax Effectiveness
The life insurance company will pay a 30% tax rate on investment earnings of non-superannuation business.
Individual policyholders do not have to pay personal income tax on earnings generated from insurance bonds. Policyholders do not have to declare the earnings on their tax return unless a withdrawal is made within the first 10 years of the bond being taken out. Withdrawals within this period may attract some personal income tax for policyholders. Many insurers will let policyholders switch between different investment units without suffering any personal tax consequences.
2. Estate Planning Strategy
Many policies will allow policyholders to nominate different beneficiaries to receive the surrender value. There are far fewer restrictions around who may qualify as a beneficiary than life cover through superannuation. This benefit will be provided tax-free.
Some policies will also offer a Death Benefit Guarantee, which can provide a clear figure on how much the policy beneficiaries will receive.
3. Investment for Children
A number of policy options will offer a Child Advancement feature to make it a tax-effective savings option for your children. This feature can also enable the policy owner to nominate when ownership of the policy will be transferred.
4. Access to Funds
Policy owners are able to withdraw funds at any time though should be warned that withdrawing within 10 years may have tax implications.
5. Smart Investment for Business Owners
Owners will have access to funds when needed and have very little paperwork to deal with.
6. 125% Investment Rule
Policyholders can contribute up to 125% of what was invested in the previous years. Each additional investment will be recognised as part of the original investment date when the funds are finally withdrawn.
This means the policy owner will not pay any extra tax on the interest that is earned on the additional contributions that are made over the life of the policy.
7. Flexibility in Policy Ownership
Fund ownership is not restricted to individual policyholders. Partnerships, companies, trusts and couples can be policy owners.
8. Investor Benefits
Some policies will offer exclusive benefits for investors. As an example, OnePath gives policy owners access to a range of health insurance, adventure, leisure, car hire, leisure experiences and retail offers.
9. Unlimited Contributions
In comparison to superannuation, contributions to investment bonds are unlimited.
Disadvantages of life insurance bonds
While there are some obvious benefits of taking out life cover through investment bonds, there are some drawbacks of this options that investors should be aware of.
1. Long-Term Investment
The 10-year tax rule makes life insurance bonds more suitable as a long-term investment option and policy owners do not really reap any investment rewards for at least 5-7 years. A term deposit can be a more suitable option if looking for a short term, secure investment option.
2. Locked Away for 10 Years
Policyholders are not able to withdraw their funds within the first 10 years if they want to avoid any tax liability. This is quite a significant drawback when you consider how frequently peoples situation can change and require a quick release of funds.