Investment bonds, also called insurance bonds, are one of the most misunderstood tax effective investment structures in ...
Investment bonds, also known as insurance bonds, are long term investment products issued by life insurance companies in Australia. They are designed to help individuals and families grow their wealth outside of superannuation in a tax effective way. Investment bonds combine the features of managed funds with unique tax treatment, making them a practical tool for saving, investing, and planning for future expenses.
Investment bonds can be a smart strategy for Australians on higher marginal tax rates, those managing intergenerational wealth, or individuals with specific estate planning needs. They are also suitable for anyone looking to invest outside of superannuation, particularly where long term planning is important. This includes parents, grandparents, and professionals wanting to invest for education, property, or future financial goals with more control and flexibility.
Many people use investment bonds to save for a child’s education, a future home deposit, or to build long term savings in a tax effective way. Because investment bonds are taxed internally at a maximum rate of thirty percent and may become entirely tax free after ten years, they can offer you a unique advantage over traditional investment structures. They also simplify estate planning by allowing direct beneficiary nomination and avoiding probate.
Invest over time with flexible contributions to grow long-term wealth outside superannuation.
Reduce tax by investing through a bond structure designed for high-income earners.
The bond owner manages the investment and can nominate beneficiaries or a successor.
Save for education or future goals using bonds that transfer to children automatically.
Bypass your estate and distribute funds tax-effectively by nominating beneficiaries on your bond.
The earlier you start an investment bond, the more powerful its compounding benefits become. Starting before major life events such as education funding, property planning, or retirement can help ensure you reach your goals more easily. Whether you are investing a lump sum or contributing regularly, investment bonds provide flexibility, discipline, and long term tax efficiency. At Dumont Wealth, we tailor investment and education bond advice to your specific goals, timeline, and future funding needs.
There are three core parties to an Australian Investment Bond: the Bond Owner; the Life Insured; and the Beneficiary. A ‘Bond Owner’ controls the investment bond and makes decisions about it like what to invest in, the ‘Life Insured’ is the person whose life is linked to the bond for payout purposes (usually the bond owner but not always), and the ‘Beneficiary’ is the person or entity nominated to receive the proceed in the event of the owner’s death (often children, spouses or Trusts).
Some bonds may include fourth party, being a ‘Nominated Beneficiary’. The bond owner may nominate a beneficiary to receive the bond proceeds in the event of the death of the life insured.
Where a bond is issued on the life of a child, and its ownership is to vest in the name of the child at a future date, the bond is subject to Child Advancement Conditions. The owner of the bond may nominate an age, up to 25, at which the ownership of the bond will transfer to the child. This can help you to ensure that the funds are not mis appropriated by a child that may not be of sound maturity in their teenage years.
While investment bonds in Australia are often described as a ‘single premium’ or lump sum investment, many investment bonds accept both regular and irregular additional investments. Provided the amount invested in any one year, based on the anniversary of the bond commencing, does not exceed the previous year’s investment by more than 125%, it will be considered part of the initial investment.
If your contributions exceed 125% of the previous years’ investment, the 10 year period will reset. If you do not make a contribution in any one year, a contribution in following years will reset the 10 year rule.
Insurance bonds are ‘tax paid’ investments, which means that earnings are taxed at a corporate tax rate through the hands of the life insurance company, which is typically at a rate of 30%. However, when considering deductions, offsets and credits, the actual tax rate of the investment bond can be much lower than 30%.
Given the tax rate can be lower than 30%, this provides a good opportunity for high income and high net worth individuals to make tax effective investments. An investment bond is designed to ideally be held for more than 10 years to obtain significant tax advantages.
After a full 10 years the returns on your investment (i.e., the capital growth), including additional contributions that meet the 125% rule, will be tax free. Investment bonds can also be useful for shorter durations given the inherent tax efficiencies at 30% tax rates. During this period, you can still access the investments and make withdrawals, but it needs to be considered on a case-by-case basis.
If you withdraw money before 10 years, you will report this as taxable and assessable income with a 3o% tax offset to compensate for the tax already paid by the life insurance company. Where an investor’s personal tax rate is less than 30%, any unused portion of the tax offset can be used to reduce tax payable on other income in the same financial year. 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.
Earnings from an investment bond are subject to a unique tax treatment based on how long you hold the investment. For the first eight years, 100 percent of the earnings are included in your assessable income if withdrawn, with a 30 percent tax offset applied. In the ninth year, only two-thirds of the earnings are included in your income, still with the 30 percent offset. By the tenth year, just one-third is assessable. After ten years, all earnings become entirely tax free and do not need to be reported in your assessable income, making investment bonds an attractive long-term strategy for tax-effective wealth growth.
This tax treatment is an excellent incentive for long-term investors who are making decisions for their retirement or next generation. It is a tax effective method for high income earners to accumulate money outside of superannuation, as well as build a tax effective nest egg to fund child expenses in the future. The investment earnings are calculated by referencing a formula contained in the Australian Taxation Office’s Income Tax Ruling 2346.
The life insurance company issuing the investment bond may offer a range of investment options such as single asset funds including cash, fixed interest, shares, property funds or a range of diversified options. Each option has different investment goals, timeframes, risk profiles and underlying assets. Seek advice before selecting an investment option.
The key risks are largely determined by the nature of the investment chosen. Risks to be aware of include market risks, fees and timelines. The performance of the investment bond will be affected by the assets and securities that it invests into. Moreover, fees may vary depending on the investment bond provider and investment options chose. These fees are typically management and administration fees and buy-sell spreads. Timelines are also important to consider given the long-term focus on these bonds. If you intend to access the capital in a short period of time this solution may not be suitable for you.
If you would like to discuss your long-term investment and insurance bond options, we encourage you to book a free consultation or request a callback and we will be in touch.
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