Investment and insurance bonds
Investing for the long haul
Investment bonds, also known as insurance bonds or growth bonds,
are investments offered by insurance companies and friendly
societies. They have features similar to a managed fund combined
with an insurance policy and can be a tax effective way to invest
for the long-term if certain rules for making contributions and
withdrawals are followed.
Here we explain how investment bonds work so you can decide if
they are right for you.
What is an investment bond?
An investment bond is technically a life insurance policy so you
need to nominate a life to be insured and a beneficiary. It is a
long term investment with features similar to a managed fund
combined with an insurance policy.
If you are considering an investment bond, make sure it
offers investment options that suit your risk profile.
Investment bonds can be tax effective for long term investors
with a marginal tax rate higher than 30%, as long as certain rules
Your money is pooled with money from other investors and a
portion of the pooled funds is then invested in the investment
options each investor chooses.
Most investment bonds offer investment options such as cash,
fixed interest, shares, property, infrastructure or a range of
diversified investment options, with risk levels ranging from low
risk to high risk. The value of the investment bond will rise or
fall with the performance of the underlying investments.
An investment bond is designed to be held for at least 10 years.
You can make additional contributions over the life of the
insurance bond. To make the most of the tax benefits, each year you
can contribute up to 125% of your previous year's contribution.
Money can be withdrawn from the investment bond at any time,
however if you withdraw your money before the 10 years is up, some
of the income may be taxable, depending on when the withdrawal is
If no withdrawals are made in the first 10 years any earnings on
the bond will be tax free.
Insurance bonds may provide estate planning opportunities for
some investors. When an investment bond is set up, you'll need to
nominate a policy owner, a life or lives to be insured and
beneficiaries. The policy owner may be the same as the life
If the last insured person passes away, the beneficiary receives
the proceeds from the insurance bond tax free. If there is no
nominated beneficiary, the proceeds will go to the policy owner or
the policy owner's estate.
Most investment bonds also offer a child advancement policy
where ownership of the policy is able to be transferred to a child
when they reach a nominated age. This can be a tax effective way to
save for a child's future.
If you are considering using investment bonds for estate
planning, seek professional legal advice first.
Rules for investment bonds
10 year rule
Investment bonds are tax paid investments. This means when
earnings on the investment are received by the insurance company,
they are taxed at the corporate tax rate (currently 30%) before
being reinvested in the bond. This can make insurance bonds a tax
effective long term investment for those with a marginal tax rate higher than 30%.
Find out your marginal tax rate.
Income tax calculator
If you hold the bond for at least 10 years the returns on the
entire investment, including additional contributions made, will be
tax free subject to the 125% rule.
If you make a withdrawal within the first 10 years,
the rate at which earnings in the investment bond are taxed will
depend on when you make the withdrawal.
Tax treatment of investment bond
|Year withdrawal made
|Withdrawals within 8 years
|| 100% of the earnings on the investment bond are included
in your assessable income and a 30% tax offset applies*.
|Withdrawals in the 9th year
|| 2/3 of earnings on the investment are included in your
assessable income and a 30% tax offset applies.
|Withdrawals in the 10th year
||1/3 of earnings on the investment are included in your
assessable income and a 30% tax offset applies.
|Withdrawals after the 10th year
||All earnings on the investment are tax free and do not need to
be included in your assessable income.
The 125% rule
Investors in investment bonds can make additional contributions
each year. As long as the contribution does not exceed 125% of the
previous year's contribution, it will be considered part of the
initial investment. This means each additional contribution does
not need to be invested for the full 10 years to receive the full
If contributions are made to the investment bond that exceed
125% of the previous year's investment, the start date of the 10
year period will reset to the start of the investment year in which
the excess contributions are made. You will then have to wait a
further 10 years from this date to gain the full tax benefits.
No contributions in a year
If you do not make a contribution to the investment bond in one
year, any contributions in following years will reset the 10 year
Case study: Alison's investment bond
Alison's marginal tax rate is 37% so she decides
set up an investment bond as a tax effective way to save for her
young daughter's future education expenses.
When Alison sets up the investment bond, she contributes
$10,000. In the following year the maximum she can contribute and
still stay within 125% of the previous year's contribution is
$12,500. In the third year the maximum she can contribute without
restarting the 10-year period is $15,625.
The graph below shows the maximum Alison can contribute each
year without restarting the 10-year period.
If Alison wanted to contribute more than $12,500 in the second
year, she would have to wait 10 years from the second year, to get
the full tax benefit.
Pros and cons of investment
Benefits of investment bonds
Here are some of the benefits of investment bonds:
- Can be a tax effective long term investment provided certain
rules are followed.
- Most offer a wide range of investment options to cater for
different investment strategies and risk profiles.
- Can be an effective way to save for a child's future.
- Can be used as an estate planning tool.
- May be useful for people who are unable to contribute to
- Investments are not normally subject to capital gains tax.
Risks of investment bonds
Here are some of the risks of investment bonds:
- You will pay fees, which vary widely depending on the issuer of
the investment bond and the investment options chosen.
- They can be slower than some investments to convert the balance
to cash and some investment bonds have minimum balances that must
- You are relying on the skills of other people to manage your
investment, and you do not have direct control over investment
- If you need to withdraw some of your money before the 10-year
period is reached some of the tax benefits will be lost.
Things to consider before
taking on an investment bond
If you are considering investing in an investment bond here are
some things to think about:
- Are you in it for the long haul? - The tax
benefits from investment bonds are only realised if no withdrawals
are made for 10 years and you comply with the 125% rule.
- Are you able to make regular contributions? -
These investments are particularly tax effective for people who
make regular contributions over the life of the investment.
- What investment options are available? - It is
important to choose a product that offers investment options that
are aligned with your risk tolerance and
- What are the fees on the investment bond? -
Common fees you may pay include establishment fees, contribution
fees, withdrawal fees, management fees, switching fees and adviser
service fees. Shop around and compare the fees to similar products
in the market.
- Are you using the product for estate planning
purposes? - Make sure it fits with your estate planning
Make sure you read the product disclosure statement to get an
understanding of the features, risks, costs and other
considerations. If you are not sure about any aspect of the
product, seek professional financial advice before investing.
Investment bonds may be suitable for people who
are looking for long-term investments and are unlikely to need
access to their funds for at least 10 years. They can be tax
effective for high income earners as long as certain conditions are
met. As always, read the product disclosure statement before
Last updated: 18 Oct 2017