What is an Insurance Bond?

Also known as investment bonds, insurance bonds are bond issues that are configured as single premium life insurance policies. This type of investment opportunity is common in the United Kingdom, and is also available in a number of other countries. Considered a relatively safe form of investing, bonds of this type often provide tax advantages for investors, assuming that no withdrawals are made from the bonds for a minimum period of time.

In most countries where this type of investment is available, the investment bond is part of what is known as a with-profits policy. This simply means that the life insurance policy will earn a return over time in the form of interest that is applied to the principal. Some bonds of this type are configured to calculate the interest on an annual basis. Unless the terms call for some other arrangement, the interest payment is applied to the bond itself, thus creating a source of saving for the investor.

One of the benefits of an insurance bond is that the rate of interest applied is usually higher than with other types of savings strategies. The same amount of money invested in a standard savings account would likely not yield the return that is possible with this type of single premium life assurance policy. In addition, the bonds are often considered to be just as secure, and possibly more so, than savings accounts where the financial institution can change the rate of interest earned with relative ease.

An insurance bond also offers some tax advantages for investors. Depending on the tax laws that apply, an investor can choose to not withdraw any funds from the bond for a minimum of ten years, and then be able to withdraw his or her earnings without incurring any type of tax debt. This approach makes the bond approach an ideal way to create a nest egg for later years, without any worries of how much of those savings will be consumed in paying taxes.

While the insurance bond is not available in every nation around the world, this type of investment has become more common in recent years. In some cases, changes in tax laws made the insurance bond a viable option for investors in a wider range of countries, prompting providers to begin offering the investment in new locations. At present, the insurance bond is more popular in the Old World, but interest in this type of savings arrangement has increased considerably in the New World in recent years.