An insurance bond (or investment bond) is a single premium
life assurance
Life insurance (or life assurance, especially in the Commonwealth of Nations) is a contract between an insurance policy holder and an insurer or assurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death ...
policy for the purposes of
investment
Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort.
In finance, the purpose of investing i ...
.
Due to
tax law
Tax law or revenue law is an area of legal study in which public or sanctioned authorities, such as federal, state and municipal governments (as in the case of the US) use a body of rules and procedures (laws) to assess and collect taxes in a ...
s they are a common form of investment in the
UK and some
offshore centres.
Traditionally insurance bonds were
with-profits policies and were often called ''with-profit(s) bonds''. Since the introduction of
unitised insurance fund Unitised insurance funds or unit-linked insurance funds are a form of collective investment offered life assurance policies.
An insurance company's contract may offer a choice of unit-linked funds to invest in. Insurers that offer these contracts a ...
s they have often been marketed as ''unit-linked bonds'' or ''investment bonds''.
Why invest in an insurance bond?
The decision of which 'wrapper' to place funds within (i.e. onshore bond, offshore bond or collective) can be complex and is based upon the tax position of the investor, the treatment of each
tax wrapper
A wrap account (also known as wrap service or tax wrapper) is a means of consolidating and managing an investor's investment portfolio and financial plans. Wrap fee services are offered by many financial institutions. Often wrap services are offere ...
, the likely growth and investment term.
Insurance bonds can be useful vehicles for minimizing tax as they do not incur the 50% CGT reduction on assets held for 12 months or more.
Useful features of Bonds for tax planning scenarios include the tax deferred status, the ability to write the investment in trust and reduce the inheritance tax liability on an estate, and exclusive access to expensive investment links like guaranteed or protected profits funds are to name a few. Bonds can provide income or growth and when income is required there are now bonds that can offer a set minimum guaranteed income for life of the plan holder.
For UK Financial Advisers, the Financial Services Authority is placing increasing focus on what wrapper is being recommended. Advisers must be able to demonstrate they have used a robust process when selecting a bond or collective.
Range of investment funds
Traditionally investment bonds only invested in the with-profit fund of the insurance company. However, since the late 1970s the insurers have tried to compete directly with the
unit trust
A unit trust is a form of collective investment constituted under a trust deed.
A unit trust pools investors' money into a single fund, which is managed by a fund manager. Unit trusts offer access to a wide range of investments, and depending on ...
market in offering a wide choice of unit-linked investment funds. Geographic and themed funds for almost every sector are available.
One innovation from the insurers is the distribution fund introduced by
Sun Life
Sun Life Financial Inc. is a Canadian financial services company. It is primarily known as a life insurance company.
Sun Life has a presence in investment management with over CAD$1.3 trillion in assets under management operating in a number ...
in 1979. A distribution fund is designed to provide a regular rising income for investors. This is achieved by carefully balancing income generating assets such as
corporate bond
A corporate bond is a bond issued by a corporation in order to raise financing for a variety of reasons such as to ongoing operations, M&A, or to expand business. The term is usually applied to longer-term debt instruments, with maturity of ...
s and/or property with
equities
In finance, stock (also capital stock) consists of all the shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which ownership of a company ...
. The equity element provides some growth and the other assets the income. Since 2000 distribution bonds have been very popular and have provided another option to with-profit bonds as the low risk investment of choice in the UK.
History
See also
*
Unit trust
A unit trust is a form of collective investment constituted under a trust deed.
A unit trust pools investors' money into a single fund, which is managed by a fund manager. Unit trusts offer access to a wide range of investments, and depending on ...
s
*
Collective investment scheme
An investment fund is a way of investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group such as reducing the risks of the investment by a significant percentage. These advantages inc ...
*
Life assurance
Life insurance (or life assurance, especially in the Commonwealth of Nations) is a contract between an insurance policy holder and an insurer or assurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death ...
*
Investment
Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort.
In finance, the purpose of investing i ...
*
With-profits policies
*
Unitised insurance fund Unitised insurance funds or unit-linked insurance funds are a form of collective investment offered life assurance policies.
An insurance company's contract may offer a choice of unit-linked funds to invest in. Insurers that offer these contracts a ...
s
External links
* http://www.investopedia.com/articles/pf/05/SinglePremLife.asp
Insurance
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