Securing the future along with saving has become a necessity for everyone today. In such a situation, an insurance bond is an option that maintains a balance between investment and insurance. This is a great option for those who want to save tax and also want to invest money safely for a long time.
In this blog, we will tell you every important thing related to insurance bonds in simple language – so that you do not have any problem in understanding and you can take the right decision.
What is an Insurance Bond?
An insurance bond is a long-term investment product offered by insurance companies. You invest in it by paying a lump sum premium and in return you get insurance protection along with a fixed return after a few years. You can consider it a combination of investment and life insurance.
How is it different from Mutual Fund and traditional insurance?
- Mutual Funds are only investment focused, there is no insurance cover in them.
- In traditional insurance policies, the focus is mainly on death benefit, the returns are low.
- But in an insurance bond, you get a minimum life cover along with return on investment.
Its main elements
- Lump sum investment: You have to pay the premium only once.
- Lock-in period: Usually there is a lock-in of 5 to 10 years.
- Tax benefits: Tax can be deferred on some plans or tax-free returns can also be obtained if the conditions of Section 10(10D) are met.
- Part nomination option: It makes the process of financial planning and will easier.
Example : Understand it like this – you have made a Fixed Deposit in which a small life insurance cover is also attached. That is, your capital is safe and security cover is also there. This balance makes the insurance bond special.
Read Also: What Is a Callable Bond?
Types of Insurance Bonds
There are many types of insurance bonds, designed based on different investment needs, risk profiles and tax planning. Below are the 3 main types that are prevalent and valid today:
1. Surety Bond
A surety bond is an agreement in which a third party (insurance company) guarantees on behalf of a person or organization that it will complete the work or service on time and properly.
- It has three parties: Principal (who has to do the work), Obligee (who needs the work), and Surety (who gives the guarantee).
- It is usually used in large construction, government tenders or contract work.
- If the contractor does not complete his work, the surety (insurance company) compensates for the loss.
Use: Infrastructure projects, government tenders, service contracts
2. Fidelity Bond
The purpose of fidelity bond is to protect companies from losses caused by fraud or improper behavior of their employees.
- It is often also called “Employee Dishonesty Bond”.
- This bond protects employers in case an employee commits theft, fraud or misuse of funds.
- It is also available for small businesses and is considered a strong means of risk management.
Uses: Banking, Financial Services, Securities Firms, Startups
3. Investment Bond
An investment bond is a life insurance policy designed for the purpose of investment. By paying a lump sum premium, you invest for a long time and in return get life cover as well as returns.
- It is usually used by individual investors who want to do tax planning and long-term investing.
- These bonds are available in several forms: Guaranteed Bond, With-Profit Bond and Market-Linked ULIP Bond (all of these will be explained in detail in the next section).
- In India, companies like HDFC Life, ICICI Prudential, and LIC offer these types of bonds.
Uses: Long-term savings, tax deferral planning, estate planning, children’s financial preparation.
Read Also: What are Social Bonds?
Sub-Types of Investment Bonds You Should Know Before Investing
1. Guaranteed Insurance Bonds
This is the safest type of insurance bond. In this, you get a pre-determined fixed return, as well as the capital is guaranteed.
- Best for risk-free investment
- Usually 5 to 10 years tenure
- Includes life insurance cover
Example: Annuity-based bonds like LIC’s Jeevan Shanti
Suitable for: Retired persons or NRIs who want fixed returns
2. Unit-Linked Insurance Bonds (ULIP-type)
In this type of bond, your investment is linked to the market, i.e. invested in equity or debt funds.
- Possibility of high returns, but risk is also high
- Suitable for long-term investors
- Both insurance cover + market returns
Example: HDFC Life Sanchay Plus ULIP option
3. With-Profit Insurance Bonds
These bonds give a share in the profits of the insurance company. You can get additional benefits in the form of bonus or fair revision.
- Bonus is usually declared annually
- Balance of risk and return
- Possibility of good returns in the long term
- Offered by large insurance companies
4. Offshore or International Insurance Bonds
These are especially for HNIs (High Net-Worth Individuals) who invest for global tax planning or currency diversification.
- Not suitable for regular investors in India
- Mostly used by NRIs living in UK, UAE or Singapore
- Helpful in tax deferral and will planning
Every investor should choose the right type of insurance bond based on his risk profile, investment period and tax planning.
Key Features of Insurance Bonds
- Single Premium Payment : Insurance bonds usually require the investor to invest the entire amount in one go. This makes them an easy and hassle-free option.
- Life Insurance Coverage : These bonds include a limited life insurance protection, which provides the amount to the nominee on the death of the policyholder.
- Lock-in period and surrender clause : These can have a lock-in period of 5 to 10 years. During this time, withdrawal of money is not possible or a penalty is levied.
- Benefit of tax deferral : Capital gains tax on investment in insurance bonds is deferred until you redeem it. This can be beneficial for long-term tax planning.
- Nominee facility and ease of succession : It is easy to add a nominee in these, so there is no legal hurdle in investment transfer.
Read Also: What is Government Bond
Who Should Consider Insurance Bonds?
- Retired Individuals : For those who want to protect capital and save taxes after retirement, insurance bonds can be a stable option.
- Non-Resident Indians (NRIs) : For NRI investors whose priority is estate planning and easy nominee transfer, these bonds are considered ideal.
- Salaried Professionals : For professionals looking for some tax-efficient and safe investment other than EPF, PPF or FD, these bonds are beneficial.
- High Net Worth Individuals (HNIs) : For those who need benefits like wealth transfer and tax deferral, this long-term instrument is useful.
Risks and limitations of insurance bonds
- Lock-in period : Insurance bonds usually have a lock-in period of 5 to 10 years, making them unsuitable for short-term needs.
- Limited liquidity : Premature surrender of bonds is not easy and may attract a penalty or charge in some cases.
- Lower returns than market : ULIP-based insurance bonds are subject to market risk, while traditional plans often have fixed returns that may be lower than mutual funds.
- Surrender charges : If you wish to withdraw your investment before maturity, some plans may have to pay surrender charges.
- Capital not guaranteed: In bonds like ULIPs, your capital may be at risk as it is linked to equity or debt funds.
Read Also: What is Straight Bond
Insurance Bonds vs ULIPs vs Mutual Funds
| Feature | Insurance Bond | ULIP | Mutual Fund |
|---|---|---|---|
| Life Cover | Yes | Yes | No |
| Tax Deferral | Yes | Yes | No |
| Lock-in | 5+ years | 5 years | No |
| Liquidity | Low | Medium | High |
| Risk Profile | Low to Medium | Medium to High | Varies |
| Goal | Estate/tax planning | Investment + Insurance | Pure investment |
Tax Treatment of Insurance Bonds in India
1. Section 10(10D) exemption
If the annual premium in an insurance bond is ₹5 lakh or less, the maturity amount is tax-free. This exemption is applicable only if all the conditions are met.
2. Tax on premium exceeding limit
If the premium in a year is more than ₹5 lakh, the maturity amount of that insurance bond will be considered as “Other Income” and will be taxed as per the slab rate.
3. TDS deduction
If the maturity or surrender amount is more than ₹1 lakh, and is not exempt under Section 10(10D), then 5% TDS will be deducted on it (under Section 194DA).
4. Investment period benefits
Keeping the investment period in insurance bonds longer gives the benefit of tax deferral i.e. no tax is levied until redemption.
Read Also: What Is Foreign Currency Convertible Bonds (FCCB)?
Conclusion
Insurance bonds are an option that provides insurance protection as well as an investment opportunity. If you are looking for a tool where the risk is low and the money is safe for a long time, then this can be an option worth thinking about. Yes, before taking a decision, definitely understand its rules, tax and lock-in aspects. A small step taken with the right information can give big benefits in the future.
Frequently Asked Questions (FAQs)
What is an Insurance Bond?
Insurance Bond is a long-term investment that is a combination of insurance and investment.
Is Insurance Bond Safe?
Yes, it is usually safe as it also includes insurance cover.
Can I withdraw money from an Insurance Bond anytime?
No, it has a lock-in period, usually 5 to 10 years.
Are Insurance Bonds tax-free?
There is a tax benefit in some cases, but it is not completely tax-free.
Who should invest in Insurance Bonds?
People who want long-term financial security and tax planning.
