What is an insurance bond?


Quick Answer

An insurance bond is a single premium life insurance policy that policy holders use as a savings investment, according to Investopedia. Common in the United Kingdom and other foreign countries, an insurance bond also allows investors to avoid paying taxes on their earnings if they do not make any withdrawals from the policy for at least 10 years.

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Full Answer

Also called investment bonds, an insurance bond usually requires a lump sum investment and works best for investors ready to keep their investment in the bond for at least five years, explains The Money Advice Service. Most insurance bonds are whole life and therefore only pay out when the investor dies or the investor agrees to surrender the bond for a payout. Some companies charge penalties for early surrender, especially within the first few years. Also, if the investor dies before he surrenders the bond, the bond may pay out slightly more than its real value because it is also considered a type of life insurance.

Depending on the performance of the insurance bond, investors can also lose money on their investment, notes The Money Advice Service. Some insurance bonds guarantee the investor's capital or returns. However, a third party usually makes this guarantee, so there is the risk that the third party could go bankrupt. Investors who choose a guaranteed insurance bond should expect to pay more in fees.

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