Insurance Bonds


Insurance Bonds (also known as Investment Bonds) are tax effective investment products offered by some life insurance companies.

There are three main points you need to understand when it comes to these investment products.

Tax rate of 30%

Instead of distributions or interest income being taxed in your hands like shares or savings accounts, the bonds themselves are taxed, less imputation credits, at a flat 30% per annum.

Ten Year Rule

If you maintain the Insurance Bond for 10 years then the original amount plus accumulated net of tax earnings can be withdrawn free of Capital Gains Tax (CGT) or any other personal income tax. As the tax benefits on withdrawals kick in after 10 years has elapsed they should be considered long term investments.

125% Rule

A major benefit of these products is the 125% Rule. Essentially it means that you can contribute up to 125% of the previous years investment amount and the new amount invested will assume the investment date of the original investment.

This is beneficial because it means that you can continue to make investments into the the bond over subsequent years and withdraw the funds on the tenth anniversary under the 10 year rule and not pay CGT.

For example, if in the first year you invest $1,000 then in the second year you can invest up to $1,250 and it will have the same start date as the original amount invested. In the third year you can invest up to 125% of the $1,250 and so it goes on for as long as you maintain it. You do not have to withdraw your funds in the tenth year and can maintain it as long as it is supported by the product provider.

Extremely Important: If you miss a year of regular investments and then restart them in a subsequent year, the 10 year period starts again for the entire amount invested. Also, if you exceed the 125% amount the 10 years period starts again. It is therefore probably very important not to stop and then start annual investments or increase annual contributions greater than 125% amount of previous years.

What are Insurance Bonds Good For?

Long Term Savings for High Tax Payers

If your marginal rate of tax is higher than the 30% which is levied on Insurance Bonds then you potentially save tax on earnings.

Long Terms Savings for Children

Parents can invest on behalf of children and nominate a future age where the ownership transfers to the child. Children or minors are subject to special rates of tax which might make holding large investments in their own name not as tax effective.

Investment Options

These products can invest into basically any asset class with many providers offering a wide range of investment choices.

Any imputation credits received from shares can be used to offset income tax payable.

Changing investment options unlike managed funds or superannuation for that matter does not trigger CGT.

Nominate a Beneficiary

You can nominate a beneficiary to receive the proceeds if you pass away. This will ensure that funds go directly to those nominated and will not be dealt with by your estate.

Access or Early Withdrawal

You can withdraw all or part your investment at any time subject to the minimum balance conditions imposed by the product provider but there are tax consequences you should understand.

Withdrawals before 8 years has passed: investment growth is included in your assessable income although you will receive a tax offset for the 30% tax that was deducted in previous years.

Withdrawals in the 9th year: one third of the growth is treated as tax paid with the remainder treated as assessable income and you again receive the tax offset for previous tax levied.

Withdrawals before the end of the 10th year: two thirds of the investment growth is treated as tax paid and the remaining third is treated as assessable income and you receive the tax offset for previously levied tax.

Summary Points

  • Earnings taxed at a flat 30%. Tax paid by the bond.
  • Ten year rule. Capital gains tax and personal income tax free after 10 years.
  • 125% Rule – regular annual investment of 125% gains 10 year rule benefits.
  • Danger – exceeding the 125% amount or stopping then starting annual investments restarts the 10 year tax free period.
  • Potential tax advantages for long term savings – for children and high tax paying individuals.

Disclaimer: Investment product features, details, related tax rules and other legislation change without notice. It is highly recommended that you seek advice from a Financial Planner before taking any action.

Insurance Bond Providers

AMP Growth Bond

Comminsure Investment Growth Bond

ING Investment Savings Bond