Life Insurance Investment Bonds Explained

When assessing your investment options, there are several excellent avenues for you to explore. Life insurance investment bonds are just one such option that is available to you when developing your investment portfolio.

In this article we will assess how life insurance bonds work, the potential risks and returns as well as the tax implications.

What is a Life Insurance Bond?

Investment bonds are a form of life insurance that is paid for with a one-off lump sum deposit at the outset of the policy rather than via monthly insurance premiums. These can be both an alternative to traditional life insurance policies as well as a potential  tax efficient investment option.As with all investments, performances and returns (or losses) will vary, however some policies will guarantee the initial investment ROI upon the event of your death.

Whilst there are undoubtedly risks with an investment product, a life insurance investment bond may offer a greater degree of certainty with regards capital protection and  returns as well as the potential for tax effectiveness.

How Does an Investment Bond Work as a Life Insurance Policy?

As with a standard life insurance policy, you will pay a monthly amount to cover you for the policy but in comparison to a standard policy, the investment bond insurance allows you to make a single payment of around £10,000 or less. In essence an investment bond is usually for a whole life span – there is no minimum term, although surrender penalties may apply in the early years.

The investment sum is then invested across a range of shares, funds and other financial vehicles. There are also two options – a fully managed fund and those that allow you have a choice of the funds in which your deposit is invested.

Some investment bonds run for a fixed term but others have no set defined investment term. When you cash your investment bonds in, how much you receive depends on how well your investment has done.

Bonds that have no defined term can be lifelong with no expiry, and unlike a standard life insurance policy – upon the event of your death, the bond is paid out to your stated beneficiaries. You are also able to withdraw some cash from the policy and you can request to surrender your policy, however there may well be tax implications.

Risk vs. Returns – The Benefits of Life Insurance Bonds

There are two forms of investment bond, which are based on the way in which your funds are invested – both have a number of pros and cons and investment risks, including:

• Unit Linked: Benefits are directly impacted by the performance of the investment. The one-off of payment will purchase units in the fund of the investors choice and the value of the policy will depend on the performance of that fund. Whilst this may offer potential higher rates of return, A fund-collapse could wipe out any returns in their entirety.
• Profit Linked: As opposed to a unit linked option, a profit linked insurance investment benefits indirectly from an investment performance. This is the most common form of offered investment and is usually added to each year with bonuses based on the performance of the investment.

Very few investments can offer an initial deposit guarantee but there are some policies that can guarantee this but will come with a higher premium.

Withdrawing Your Money from an Investment Bond

The vast majority of standard life insurance policies do not offer any withdrawal of funds as the premiums are paid monthly. A life insurance bond however does offer some access to funds but a surrender fee may be payable and there is likely to be some tax implications of doing so.

You will typically be allowed to withdraw up to a certain amount per annum, however you will not want to deplete your initial investment value by exceeding the rate of growth. Tax wise as well you may be typically allowed to withdraw some funds to the value of 5% of their value up to 20 years without immediate taxation. The 5% allowance can then be rolled over to future years should it not be cashed out.

The tax liability does not disappear however – it is simply deferred to a later date and will be added to any additional taxable incomes that are accrued at that time.

We always recommend that you take expert tax advice before looking to withdraw.

What are the Tax Implications of an Investment Bond?

There are a range of potential tax benefits to investment bonds including  savings on income tax, capital gains tax, and inheritance tax and it would always be worth consulting an independent financial adviser to better understand how these products may be beneficial to you.

Investment bonds can be a tax-efficient vehicle for investment, especially if you have used up your Individual Savings Account (Isa) allowance. Income withdrawn from the bond is not subject to basic rate tax and gains made within the bond aren’t subject to capital gains tax. Instead, gains in and income from these bonds are subjected to a life fund tax rate of 20%.

If you opt to withdraw cash you will be able to remove up to 5% a year of the bond value – you are also allowed up to 20 years without incurring an additional tax charge. If however you don’t use your 5% allowance in a given year, the allowance is carried over to the following year i.e. if you make no withdrawals in year one, you could draw up to 10% the following year without incurring a tax liability.

If you are in the higher rate or additional rate taxpayer bracket, paying say between 40-45% tax on income in the current tax year, an investment bond may be able to help minimise your income tax bill.

Where to further investigate Investment Bonds

You can further investigate investment bonds by talking to your Independent financial adviser who will be able to give you professional advice on the suitability of any potential investment in line with your current circumstances, specific objectives and future goals.

Please always take expert advice before progressing with any investment as return on profits are not guaranteed.

This article is for information only and should not be construed as a recommendation or advice, as always please consult a fully qualified independent Financial Adviser should you need advice.