The modern Insurance Bond | Tax Paid Investments

 

Insurance Bonds are medium to long-term investment vehicle (like superannuation) to tax-effectively accumulate, hold investments and distribute lump sums or periodical draw-downs.

You can use the modern insurance bond for:

Funding for major life-events
Estate planning
Alternative ‘Annuity-Like’ income streams
Alternative to superannuation (usually when superannuation has max contributions)
Education funding
Business succession funding

In Australia, insurance bonds are referred to as tax-paid investments.

They are taxed by the fund manager at a flat rate of 30%, subject to the product being held for a minimum of 10 years. You don’t need to report Insurance Bonds as part of your tax return, a great advantage!

In contract, where the bonds are withdrawn within ten years of the investment, additional tax may be payable by the investor as shown in the table below.

The 125% Rule

The 125% rule is an important factor to consider when establishing an insurance bond.

Essentially the rule is this.

Every year, additional contributions of up to 125% of the previous year’s contributions can be made to an insurance bond provided the investor does not make any withdrawals. The good news is the additional contributions don’t need to be invested for the full 10 years to acquire the tax-paid status.

A contribution example

The example below shows how using an initial investment of $10,000, an investor can take advantage of the 125% rule by making additional investments of up to 125% of investment contribution of the previous year.

As shown, a contribution of $74,506 can be made in the 10th year and still have a tax paid status after only one year. Consequently, if the term of the insurance bond extends beyond 10 years, the investor can continue to take advantage of the 125% rule. However, if no contribution is made in any one year, any further contribution will start the 10 year period again for the whole amount.

Life Insurance & Estate Planning

An added feature of insurance bonds is that they are a product that falls under the banner of life insurance. When an insurance bond is taken out, a life to be insured is elected and a beneficiary is nominated. If they die, the full accumulated balance is paid to either the policy owner or to nominated beneficiaries, completely tax-free.

Investing for Children

Finally, common use of insurance bonds is to provide for education or savings for children. Due to the fact these products can be particularly favourable in comparison to holding investments directly in the name of a child. The government applies a higher tax rate to the taxable income of a child. This discourages adults from transferring assets to their child’s name to reduce tax payable. For a child the first $416 of ‘unearned’ income is tax-free. Amounts over $416 and up to $1,444 can be taxed as high as 66%, and amounts over $1,445 are taxed at 47%.

By investing in an insurance bond, you can avoid the higher tax scale on a child’s investment. As mentioned, investment earnings on insurance bonds would be taxed at the fund manager level. At the end of the 10 year term all proceeds would be tax free to the child. They could use them for any purpose.

 

So, is it time to chat to the WE team about your money and the possibility of an insurance bond? Book in a time for a Free Strategy Session.

 


Disclaimer: Above all, information contained within this article is of a general nature. Do not be rely upon it when making financial decisions. Please consult a professional financial advisor or planner (like us!) before acting.