What is an Insurance Bond?

A company with an insurance bond is able to pay off the debt, should a company default. The bond insurer pays the principal and interest on behalf of the insurance company, which is why the company with an insurance bond is also referred to as a financial guaranty insurance company in some countries.  Bonds are rated differently and the ratings are based on the insurer’s credit. Investors of insurance bonds can often expect income throughout their lifetime, or their beneficiaries may benefit from any income or growth from the bonds as part of a trust and estate plan.

Insurance Bond Ratings

There’s a correlation between the market value of insurance bonds and the ratings issued to the insurer.  A “AAA” rated insurance bond will be worth more than an “A.” The company that wants to purchase an insurance bond can do so at a particular rating, provided the credit criteria established by the bond insurer are met. The bond insurer in turns pays the appropriate rating agency for a rating.

Insurance Bond Investment

You can invest in insurance bonds and you can purchase them from insurance companies. A common source for investment bond is life insurance companies. You pay a one-time premium to the life insurance company for a special type of life insurance policy, which is really an insurance bond investment. Then, you hold on to the investment until there would be tax advantages to withdrawing. Some bonds guarantee a minimum income payout to investors during their lifetime. The value of the bond can also be paid out to beneficiaries, if the insured dies.

Benefits of Insurance Bond Investment

While there are alternative forms of investments, some investors of insurance bonds prefer them because of the following benefits:

  • Excellent for reducing tax liability on the estate of a decedent
  • Provides supplemental income, sometimes guaranteed income
  • Has the potential for growth
  • Taxes can be deferred for certain bond and no taxes may be owed after 10 years

In some countries, like Australia, the taxes are paid upfront at the corporate rate. No additional taxes are owed as long as the investor holds on to it for 10 or more years. If you’re purchasing an insurance bond, you may also have to pay an entry fee in addition to any commission paid to a broker. You will have to factor the costs of both when making a determination as to whether there’s an overall benefit to the investing in insurance bonds.

If you want to invest in insurance bond, then find a life insurance company that issues policies to investors. Compare the company ratings as well as quotes and fees before making a final decision. A tax accountant can also help you determine whether it’s the best vehicle for your funds based on the tax implications of where you live.