Welcome to module 2 – what is a bond? To begin with, have a go at this question. You can find the answer at the end of this module.
Question 1: A bond…
Options A: …comes to an end on the death of last life assured
Options B: …is a single premium contract
Options C: …is a whole-of-life policy
Options D: …is a life assurance contract
On the next screen we’ll take a closer look at all of these components.
Bonds are offered by life offices, like AEGON Scottish Equitable and AEGON Scottish Equitable International, and are used to invest one-off lump sum payments.
The life office provides access to its own internal funds such as distribution and property funds. Many bonds are now linked to the performance of a wider range of external investments, such as unit trusts/open-ended investment company (OEIC) funds, and this approach is more common for offshore bonds.
So what is a bond?
A bond is a single premium, whole-of-life policy and is a life contract that comes to an end on the death of the last life assured. Let’s break this down in more detail.
Single premium
A bond is a form of collective investment, generally made up of a bundle of single premium life assurance policies. An individual makes one lump sum payment to the insurance company (a premium) to purchase the bond and it pays out a lump sum when the last life assured dies.
An individual can:
Whole of life policy
The bond can last for the whole of one person’s life (single life basis); for several peoples’ lives (multi-lives basis); or until the individual chooses to cash in the bond. The bond will continue until the death of the last life assured.
Life assurance
Although bonds are classified as life assurance policies they will offer a minimal amount of life cover, for example offering typical returns between 100.1% and 101% of the investment value at death.
Remember, we describe the bond as ‘a form of collective investment, usually a bundle of single premium life insurance policies’. This means that:
For example, an investment of £100,000 in total could be arranged as 10 segments of £10,000, or 100 segments of £1,000. As the investment grows, so too does the value of each segment.
For example a bond has a premium of £100,000 and is made up of 10 segments, each worth £10,000. If the bond value increases to £200,000 then each of the 10 segments has a value of £20,000.
Now try this question. You can find the answer at the end of this module.
A bond can have many lives assured. Is this statement true or false?
Option 1 – True
Option 2 – False
One of the key benefits of a bond is it allows tax deferral on the growth of the policy even when you withdraw part of your investment. This means the bond can be used for effective tax planning, particularly for higher rate taxpayers.
Generally an individual can defer paying personal income tax until they fully cash in their bond, or make large withdrawals. If they can wait until they’re in a lower tax band before cashing in their policy then this could be a valuable tax planning opportunity. Remember that, unless the product has inbuilt guarantees, benefits aren’t guaranteed and the value of investments can go down as well as up.
Bond tax and capital gains tax
A bond is not liable to CGT unless it has previously changed hands for value (for example it has been sold and is now a second-hand bond).
For the purpose of this training, we’ll be referring throughout the course to bonds which are non-qualifying life policies. Qualifying life policies are generally regular premium onshore policies that attract tax benefits. We don’t deal with qualifying life policies on this course. We’ll explain the tax treatment of a bond for an individually owned, onshore or offshore investment.
Where there are exceptions to this rule we’ll let you know.
Answers to questions in module 2
Question 1: A bond…
Options A: …comes to an end on the death of last life assured
Options B: …is a single premium contract
Options C: …is a whole-of-life policy
Options D: …is a life assurance contract
Answer
The correct answer is options A, B, C and D. All of the statements above describe the conditions of a bond. A bond is a single premium, whole-of-life policy and is a life contract that comes to an end on the death of the last life assured.
Question 2
A bond can have many lives assured. Is this statement true or false?
Option 1 – True
Option 2 – False
Answer
The correct answer is option 1 – True. Well done if you’ve remembered that the bond can last for the whole of one person’s life (single-life basis) or for several peoples’ lives (multi-lives basis).