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An insurance bond (or investment bond) is a single premium life assurance policy for the purposes of investment.
Due to tax laws 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 funds they have often been marketed as unit-linked bonds or investment bonds.
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, 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.
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 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 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 bonds and/or property with equities. 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.
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A dividend is a distribution of profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a portion of the profit as a dividend to shareholders. Any amount not distributed is taken to be re-invested in the business. The current year profit as well as the retained earnings of previous years are available for distribution; a corporation is usually prohibited from paying a dividend out of its capital. Distribution to shareholders may be in cash or, if the corporation has a dividend reinvestment plan, the amount can be paid by the issue of further shares or by share repurchase. In some cases, the distribution may be of assets.
A mutual fund is an investment fund that pools money from many investors to purchase securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe include the SICAV in Europe and open-ended investment company (OEIC) in the UK.
Life insurance 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 of an insured person. Depending on the contract, other events such as terminal illness or critical illness can also trigger payment. The policyholder typically pays a premium, either regularly or as one lump sum. The benefits may include other expenses, such as funeral expenses.
Variable universal life insurance is a type of life insurance that builds a cash value. In a VUL, the cash value can be invested in a wide variety of separate accounts, similar to mutual funds, and the choice of which of the available separate accounts to use is entirely up to the contract owner. The 'variable' component in the name refers to this ability to invest in separate accounts whose values vary—they vary because they are invested in stock and/or bond markets. The 'universal' component in the name refers to the flexibility the owner has in making premium payments. The premiums can vary from nothing in a given month up to maximums defined by the Internal Revenue Code for life insurance. This flexibility is in contrast to whole life insurance that has fixed premium payments that typically cannot be missed without lapsing the policy.
An endowment mortgage is a mortgage loan arranged on an interest-only basis where the capital is intended to be repaid by one or more endowment policies. The phrase "endowment mortgage" is used mainly in the United Kingdom by lenders and consumers to refer to this arrangement and is not a legal term.
An offshore fund is generally a collective investment scheme domiciled in an offshore jurisdiction. Like the term "offshore company", the term is more descriptive than definitive, and both the words 'offshore' and 'fund' may be construed differently.
A segregated fund or seg fund is a type of investment fund administered by Canadian insurance companies in the form of individual, variable life insurance contracts offering certain guarantees to the policyholder such as reimbursement of capital upon death. As required by law, these funds are fully segregated from the company's general investment funds, hence the name. A segregated fund is analogous to the U.S. insurance industry "separate account" and related insurance and annuity products.
A self-invested personal pension (SIPP) is the name given to the type of UK government-approved personal pension scheme which allows individuals to make their own investment decisions from the full range of investments approved by HM Revenue and Customs (HMRC).
In U.S. financial law, a unit investment trust (UIT) is an investment product offering a fixed (unmanaged) portfolio of securities having a definite life. Unlike open-end and closed-end investment companies, a UIT has no board of directors. A UIT is registered with the Securities and Exchange Commission under the Investment Company Act of 1940 and is classified as an investment company. UITs are assembled by a sponsor and sold through brokerage firms to investors.
Unitised insurance funds or unit-linked insurance funds are a form of collective investment offered life assurance policies.
An endowment policy is a life insurance contract designed to pay a lump sum after a specific term or on death. Typical maturities are ten, fifteen or twenty years up to a certain age limit. Some policies also pay out in the case of critical illness.
The following outline is provided as an overview of and topical guide to finance:
AmBank Group comprises AMMB Holdings Berhad is one of the largest banking groups in Malaysia whose core businesses are retail banking, wholesale banking, Islamic banking, and life and general insurance.
A fund platform or investment platform is an online service that allows investments to be bought online. Fund platforms may simplify the process of investing or provide investments at a discounted rate.
Private placement life insurance is a form of cash value universal life insurance that is offered privately, rather than through a public offering.
Small Self Administered Scheme (SSAS) is a type of UK Occupational Pension Scheme.
Insurance-linked securities (ILS) are broadly defined as financial instruments whose values are driven by insurance loss events. Those such instruments that are linked to property losses due to natural catastrophes represent a unique asset class, the return from which is uncorrelated with that of the general financial market.
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 include an ability to:
A with-profits policy (Commonwealth) or participating policy (U.S.) is an insurance contract that participates in the profits of a life insurance company. The company is often a mutual life insurance company, or had been one when it began its with-profits product line. Similar arrangements are found in other countries such as those in continental Europe.
Qualifying Investor Alternative Investment Fund or QIAIF is a Central Bank of Ireland regulatory classification established in 2013 for Ireland's five tax-free legal structures for holding assets. The Irish Collective Asset-management Vehicle or ICAV is the most popular of the five Irish QIAIF structures, it is the main tax-free structure for foreign investors holding Irish assets.