The top 7 benefits of investing in insurance bonds

With such a wide range of investments available and little media coverage, it’s not surprising that insurance bonds can be overlooked by investors.

In simple terms, an insurance bond is a cross between a life insurance policy, a superannuation account and a managed fund. You invest your money into a managed investment portfolio (of your choosing) that is internally-taxed and a beneficiary is nominated if you die during the investment term.

Here are the top 7 benefits of investing in insurance bonds:

1) No capital gains tax after 10 years

Funds can be accessed from an insurance bond at any time, however after 10 years they can be accessed without any tax to pay on the profit. If funds are withdrawn before year 9, 100% of the profit will be tax assessable. If withdrawn in year 9, two-thirds will be assessable and if in year 10, one-third will be assessable.

2) Income tax savings

Insurance bonds are taxed internally at 30%. This means you don’t have to claim the earnings in your tax return like some other investments. If your own marginal rate of tax is greater than 30%, you may pay less tax on your investment if you purchase an insurance bond.

3) Ability to borrow

Some providers offer an internal loan facility. Where offered, this allows you to use your insurance bond as security for a loan, allowing you to invest in other assets.

4) Regular savings plan available

You can elect to make regular contributions to an insurance bond. However, there are limits to how much you can contribute. Each year, you can contribute up to 125% of the previous year’s contribution. These contributions don’t restart the 10 year period and are also available tax-free after 10 years.

5) Estate planning advantages

Insurance bonds allow you to nominate a beneficiary in the event of death. This means proceeds are paid directly to beneficiaries, they aren’t distributed in accordance with your Will and they don’t form part of your estate. Because of this, proceeds from an insurance bond generally cannot be challenged (i.e. only estate assets distributed via a Will can usually be challenged). Additionally, unlike superannuation, proceeds from an investment bond will always be paid tax-free, regardless of who the beneficiary is.

6) Choice of ownership structure

Insurance bonds can be owned individually or jointly, or via a company or trust. Additionally, ownership can generally be transferred to another party without incurring stamp duty or tax liabilities and without recommencing the 10 year period.

7) Bankruptcy

Insurance bonds are protected from the trustee of bankruptcy where you are the bankrupt and the life insured of the policy. It should be noted however, that transfers to an insurance bond with the intention to defeat creditors may not be protected from the trustee.

Given the above benefits, insurance bonds should be a consideration when evaluating your next investment. However, whether they are suitable or not will depend on your own individual circumstances. Before making your investment decision it’s always wise to consult with a financial planner.

 


This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial and tax advice prior to acting on this information.Opinions constitute our judgement at the time of issue and are subject to change. Financial Planning Expert Pty Ltd does not give any warranty of accuracy, nor accept any responsibility for errors or omissions in this document.
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    Financial Planning Expert is an independent financial planning business based in Melbourne. We provide genuinely independent and conflict free financial advice. We’re experts in self-managed superannuation fund (SMSFs) advice and strategy, retirement planning, property and share investment advice, life and income protection insurance, tax planning, asset protection, estate planning and advice for Australian expatriates.