Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 104

Will insurance bonds become the new superannuation?

Insurance bonds are an almost forgotten investment product which is starting to emerge amongst better planners and wealth management groups. Money is slowly moving back in to this form of saving for higher income earners.

Insurance bonds have some strong features:

  • uncapped contributions
  • flexibility of investment options and more under development
  • access to money regardless of age
  • generally low cost
  • tax at 30% during the taxed period.

What is the 10 year rule for investment bonds?

If the investment bond is held for 10 years or more, no additional tax is payable on investment earnings.

The tax treatment of investment earnings from the bond depends upon the timing of the withdrawal:

  • up to the 8th year all earnings are assessable (less offsets, see below)
  • during the 9th year 2/3rd earnings are assessable (less offsets)
  • during the 10th year 1/3rd earnings are assessable (less offsets)
  • after the 10th year all earnings are not assessable (ie tax is already paid)

Additionally, the tax treatment is not only for the initial amount invested, but each year after the initial year you can contribute up to 125% of the previous year’s amount and still stay within the 10 year rule. However, if you stop contributing for a year, the next time starts a new 10 year period for that new money and the balance that was previously there continues on the pre-existing 10 year period. Following the logic, if contributions for the last year were nil, then 125% of nil is nil.

If the bond is withdrawn before the expiry of the 10 year period, the profit (proceeds less total amounts invested) will be included in the investor’s assessable income and be taxed at their marginal tax rate. However, any profit that is assessable receives a tax offset of 30%.

As superannuation becomes more controlled with more tax applied to it, especially for larger income earners, this vehicle provides a mechanism for people to tax-efficiently invest and still have access.

Who is best suited to insurance bonds?

Insurance bonds are worth considering by anyone who has a marginal tax rate greater than 30% that directly affects their savings.

Insurance bonds are still not as efficient as super, under the current legislation, as a savings vehicle, although insurance bonds may provide greater access, depending on age. However, superannuation tax incentives may change and tilt the scales more towards insurance bonds.

The downside is that the structures are predominantly unchanged from 20 years ago and many only have managed fund options. Change is happening here though.

What about Self Managed Insurance Bonds?

The question I am hearing is when will we see a Self Managed Insurance Bond (SMIB) where investments can be directed more like an SMSF?

Technically that is possible now but expensive because each SMIB must be its own life company and hold a licence. As this develops however we may see the insurance companies offering investment options in directed investments for managed funds, direct shares and cash and even Separately Managed Accounts.

As a SMSF provider we are certainly looking at the merits of building this type of service in the future.

Who knows where the superannuation industry will end up in relation to tax. What we know is that the media is playing a part in focusing on superannuation as a tax issue and unfortunately looking at it in isolation to all retirement assets. The Cooper Review tried to focus attention on retirement rather than superannuation but that seems to have been left to the halls of time. All good advice must have one eye to the future so perhaps the trickle we see may become a trend and SMIB may become a future buzz acronym.

 

Andrew Bloore is Chief Executive of SuperIQ, a leading administrator and provider of integrated services for SMSFs. This article is general information and does not address the personal circumstances of any individual.

 

4 Comments
Adam
May 06, 2015

I would just be happy with a bond that gives more choice and operates more like a full wrap account. The available investment options on current bonds are completely uninspiring benchmark hugging (mostly) assets. If moving to a Self Managed asset is the way next way forward, well I would support that too. It would also force the current operators to become more competitive and enhance their offering.

Bob
May 05, 2015

You talk of "only managed fund options" as if this is a bad thing. There is nothing intrinsically wrong with a managed fund...only the vehicle within which you own it.

A unit trust structure means that an investor is purchasing other investors embedded gains and/or income. A unit trust must distribute realised capital gains as income; often at an inconvenient time for the investor. Thus converting capital to income for the investor.

A tax paid vehicle, such as an investment bond, makes contingency for income and capital gains tax, as income and growth occurs. This contingent tax is always reflected in the unit price. This means that you are never buying another investor's tax position. In addition, an investment bond converts income into capital; a fundamental (and important) difference between unit trusts and investment bonds.

It amazes me that so many "professional" advisers don't actually understand the workings of the product structure that they are selling to clients.

John
April 13, 2015

"downside is that the structures are predominantly unchanged from 20 years ago and many only have managed fund options."

... this is the issue, of being beholden to the providers, which naturally utilise their own products, and with insufficient transparency/ flexibility

Andrew Bloore
April 14, 2015

Yes, but to my point, that is changing. I can see us generating a vehicle that allows all the same investments that can be held via an SMSF as this develops. Your point is reflective of the past but the view of the future is dynamic and that is as very interesting development.

 

Leave a Comment:

RELATED ARTICLES

When death benefits include life insurance

A tax-effective complement to super

Meg on SMSFs: Ageing and its financial challenges

banner

Most viewed in recent weeks

Simple maths says the AI investment boom ends badly

This AI cycle feels less like a revolution and more like a rerun. Just like fibre in 2000, shale in 2014, and cannabis in 2019, the technology or product is real but the capital cycle will be brutal. Investors beware.

Why we should follow Canada and cut migration

An explosion in low-skilled migration to Australia has depressed wages, killed productivity, and cut rental vacancy rates to near decades-lows. It’s time both sides of politics addressed the issue.

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Australian house price speculators: What were you thinking?

Australian housing’s 50-year boom was driven by falling rates and rising borrowing power — not rent or yield. With those drivers exhausted, future returns must reconcile with economic fundamentals. Are we ready?

Retirement income expectations hit new highs

Younger Australians think they’ll need $100k a year in retirement - nearly double what current retirees spend. Expectations are rising fast, but are they realistic or just another case of lifestyle inflation?

Welcome to Firstlinks Edition 627 with weekend update

This week, I got the news that my mother has dementia. It came shortly after my father received the same diagnosis. This is a meditation on getting old and my regrets in not getting my parents’ affairs in order sooner.

  • 4 September 2025

Latest Updates

Shares

Why the ASX may be more expensive than the US market

On every valuation metric, the US appears significantly more expensive than Australia. However, American companies are also much more profitable than ours, which means the ASX may be more overvalued than most think.

Economy

No one holds the government to account on spending

Government spending is out of control and there's little sign that Labor will curb it. We need enforceable rules on spending and an empowered budget office to ensure governments act responsibly with taxpayers money.

Retirement

Why a traditional retirement may be pushed back 25 years

The idea of stopping work during your sixties is a man-made concept from another age. In a world where many jobs are knowledge based and can be done from anywhere, it may no longer make much sense at all.

Shares

The quiet winners of AI competition

The tech giants are in a money-throwing contest to secure AI supremacy and may fall short of high investor expectations. The companies supplying this arms race could offer a more attractive way to play AI adoption.

Preparing for aged care

Whether for yourself or a family member, it’s never too early to start thinking about aged care. This looks at the best ways to plan ahead, as well as the changes coming to aged care from November 1 this year.

Infrastructure

Renewable energy investment: gloom or boom?

ESG investing has fallen out of favour with many investors, and Trump's anti-green policies haven't helped. Yet, renewables investment is still surging, which could prove a boon for infrastructure companies.

Investing

The enduring wisdom of John Bogle in five quotes

From buying the whole market to controlling emotions, John Bogle’s legendary advice reminds investors that patience, discipline, and low costs are the keys to investment success in any market environment.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.