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Insurance Bonds - An alternative to Superannuation

Insurance bonds may be a viable alternative to super for some, having various tax and estate planning advantages. The total superannuation balance and reduction in contribution limits may reduce the ability of clients to contribute to super. As a result, it is valuable to assess your long-term investment alternatives. One option to consider is insurance bonds. With these ‘internally taxed’ investments, tax is paid by the provider at the company tax rate, which is currently 30%. While this tax rate is higher than the 15% paid in super, it can be more attractive than paying tax at up to 47% (including the Medicare Levy) on personally owned investments for people who are constrained by the total super balance, contribution caps and/or want access to the money at all times.

Insurance bonds are a long term investment designed to be held for at least 10 years. They have features similar to a managed fund but are structured as an insurance policy. They offer a wide range of investment options catering to different risk profiles and clients can nominate a life insured and a beneficiary. Here we explain when and why insurance bonds may be a suitable investment option and outline other key strategic considerations, as well as the tax and social security treatment

Alternative to Super

The ability and amount that can be contributed to superannuation for some clients is impacted by the:

  • requirement to satisfy the work test if aged 65 to 74 and no contributions from age 75 (unless mandated employer contributions)

  • concessional contribution cap of $25,000 pa

  • non-concessional contribution cap of $100,000 p.a. and bring forward rule which is subject to a total superannuation balance of $1.6 million, and

  • transfer balance cap of $1.6 million limiting the amount that can be transferred to the retirement phase of superannuation. These changes make it increasingly difficult for high income earners and high superannuation account balance holders to contribute to super in order to maximise their retirement savings.

Furthermore, the preservation rules, as well as the work test and restrictions that apply to the bring-forward rule for clients aged 65 or over, make super more restrictive than other investment options. In these situations, insurance bonds may provide a more tax-effective alternative to personally owned investments where earnings and gains are taxed at marginal rates of up to 47%.

Other considerations Insurance bonds have no age restrictions when making contributions or making withdrawals. These also offer tax planning opportunities for lower income earners, estate planning prospects and a range of other benefits.

In the case of lower income earners, if a their marginal tax rate is less than 30%, they may benefit from cashing in all or part of a bond before the 10 year anniversary. This is because a 30% tax offset is available when a bond is cashed in and the growth portion is included in assessable income. As a result, bonds can be held tax-effectively in the name of a spouse or other family member who pays tax at a low marginal rate.

With estate planning, insurance bonds have some features similar to an ordinary life insurance policy in that there is a policy owner and a life insured. There can also be a nominated beneficiary. Like superannuation, the funds can be paid directly to certain beneficiaries and do not automatically form part of the estate . But, unlike super, there are no restrictions on who can be nominated as a beneficiary and the proceeds are received tax-free by all potential beneficiaries.

In trust

Some may consider a discretionary trust as an option. However, trusts need to distribute income to avoid it being taxed in the hands of the trustee at the highest marginal tax rate. An insurance bond could be used to manage the amount of income being derived in a trust. As the insurance bond earnings are not income unless a withdrawal is made within the 10 year anniversary, no income will ordinarily be attributed to the trust. This means there is no income from this investment to distribute to beneficiaries. This allows those earnings to be taxed within the bond at 30% rather than being distributed to beneficiaries with either a higher marginal tax rate or being taxed in the hands of the trustee. Historically, this strategy was used to reduce the income for social security and aged care purposes. However legislative changes have resulted in a reduction in the benefit of this strategy for those clients.

Switching investment options

Unlike an investment in most managed funds, investment options can be changed at any time within the insurance bond without triggering any personal tax implications. Where capital gains are realised in most managed funds, this may increase assessable income for the relevant financial year and impact a client’s eligibility for certain Government benefits and concessions or liability to pay levies. Examples include eligibility for the low income tax offset, liability for HECS repayments or impact on Family Tax Benefits.


There is a potential protection advantage when it comes to bankruptcy. Insurance bonds are protected from the trustee in bankruptcy if the life insured is the bankrupt individual or their spouse. However, transfers to an insurance bond that were made to defeat creditors may be available to the trustee in bankruptcy.


Earnings are taxed in the bond at the life company rate (currently 30%). Tax paid in the fund may be reduced by franking credits. The 50% CGT discount for investments held greater than 12 months is not available to life insurance companies and the full amount of capital gains realised in the fund is taxed at 30%.


Tax-free withdrawals are allowed in some circumstances other than the completion of the 10 year period. These are when the bond:

  • matures due to the death of insured person

  • is surrendered due to an accident, illness or other disability of the insured person, or

  • is surrendered due to severe financial hardship .

Social security and aged care

Insurance bonds are financial investments and subject to deeming under the income test and count as an asset under the assets test for benefits such as the Age Pension. However, entitlements to the benefits which are based on a definition of adjusted taxable income (e.g. family tax benefit) are not affected by these investments unless a withdrawal is made within the 10 year anniversary period.

If held through a trust, the private trust rules will apply and the value of the trust will be attributed either to the person who provided the source of the funds or the person who controls the funds for assets test purposes. Under the income test, it is the actual income of the trust, based on tax rules, that will be attributed. As an insurance bond does not distribute income, there is no income assessment for social security purposes for trusts unless a withdrawal is made within the 10 year anniversary period.

Disclaimer This information is current as at 08/03/19.This article has been prepared by Heart1Stop, a social media brand owned by Heart Mortgage Services and Heart Financial Advisers. The information contained in this article is an overview or summary only and it should not be considered a comprehensive statement on any matter nor relied upon as such. The views expressed here are not those of Heart1stop, Heart Mortgage Services, Heart Financial Advisers, shareholders, directors or staff and associated contractors and business associates. This article has been prepared without taking into account any person’s objectives, financial situation or needs. Because of this, you should, before acting on any information contained in this article, consider its appropriateness, having regard to your objectives, financial situation or needs. Any taxation information contained in this article is a general statement and should only be used as a guide. It does not constitute taxation advice and is based on current laws and their interpretation. Each individual’s situation may differ, and you should seek independent professional taxation advice on any taxation matters. While the information contained in this article may contain or be based on information obtained from sources believed to be reliable, it may not have been independently verified. Where information contained in this publication contains material provided directly by third parties it is given in good faith and has been derived from sources believed to be accurate at its issue date. It is not the intention of Heart1Stop or Heart Mortgage Services and Heart Financial Advisers that this publication be used as the primary source of readers’ information but as an adjunct to their own resources and training. To the maximum extent permitted by law: no guarantee, representation or warranty is given that any information or advice in this publication is complete, accurate, up to date or fit for any purpose; and no party of Heart1Stop or associated entities as mentioned is in any way liable to you (including for negligence) in respect of any reliance upon such information. This article may also contain links to websites operated by third parties ("Third Parties") who are not related to Heart1Stop. These links are provided for convenience only and do not represent any endorsement or approval by us.

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