Insurance bonds are enjoying a revival, as high-income earners who are limited to putting $25,000 of concessional contributions into super each year, look for tax-effective alternatives.
Generation Development Group reports that its Generation Life business sold $224 million of investment bonds in 2018/19, with funds under management rising 21 per cent to $1.07 billion.
GDG says this represents 32 per cent of market inflows and claims that Generation Life is now the number two player in the insurance bond (also called investment bond) market, behind Australian Unity.
The other big players in the market are IOOF, Centuria and Commonwealth Bank.
Generation Life has 49 investment options across all asset classes. Investment managers include Vanguard, BlackRock AMP Capital, Pendal, Magellan and Legg Mason.
The number of planners actively recommending the products rose 21 per cent to 928.
Insurance bonds differ from other types of managed funds in a number of ways. Technically, insurance bonds are life insurance policies.
They are tax paid investments, which means that when earnings on the investments are received by the insurance company, they are taxed at the corporate tax rate, which is currently 30 per cent, before being reinvested in the bond.
If investors hold them for at least 10 years the returns on the entire investment, including additional contributions made along the way, will be tax free.
This can make them a tax-effective investment for anyone with a marginal tax rate above 30 per cent.
Because they are life policies, the investor can nominate a beneficiary.
Insurance bonds have always been a niche product and one of their drawbacks is that there is a limited range of product on offer, compared with the range of unit trust offerings.
But if the trend identified by GDG continues, there might be more product before too much longer.