www.InvestmentGuide.co.uk
www.InvestmentGuide.co.uk Other forms of investment type Life Insurance
LIFE INSURANCE
Lump sum invested with a life insurance company giving the
impression that there is a high fixed interest rate, usually for terms of 5
years. Versions which pay out interest are called Income Bonds; those which
accumulate income are called Growth Bonds. However although this type of Bond
pays a high 'income', it does not guarantee that you get all the capital of
your investment back on maturity. What you get back usually depends on the
growth in a stock market index, e.g. FT-SE 100 (which measures the share prices
of the largest 100 UK quoted companies) or the S&P 500 (which measures the
share prices of the largest 500 US quoted companies).
For example in
one offer made in October 1995, both indices must grow by 2% a year compound
over the 5 years for you to get all your money back. If the growth is nil or
negative you would receive only £4,500 of a £10,000 investment. You
would received 11% a year 'income' which comes to £1,100 times 5 equals
£5,500. Add back in the £4,500 proceeds and you have £10,000
so , at worst, your investment has had no return, but you have meanwhile spent
some of your capital. If the growth is more than 2% a year, you don't get any
more than your money back at the end.
Some of the holders of these
types of bonds are going to be in for a big shock if they mature soon as the
Stock Market has fallen so deeeply since their launch.
Who can invest Anyone.
How worthwhile For pessimists this is an interesting way to spend your capital. For optimists it is a limited risk excursion into the stock market. Basic rate and higher rate taxpayers compare 'Growth' Bonds with Life Insurance Growth or Income Bond, National Savings Fixed Issue Certificates and Income Bonds with Life Insurance Growth or Income Bond, Stock Government Fixed-lnterest. Non-taxpayers consider instead of 'Growth' Bonds Co-operative Society Term Account or National Savings Capital Bond and instead of 'Income' Bonds, Stock Government Flxed-lnterest or Stock Debenture and Loan. If you are interested in the Stock Market with a downside guarantee consider also Bank and Building Society Stock Market Guaranteed Bond or Life Insurance Stock Market Guaranteed Bond.
Minimum £5,000, £7,500 or £10,000.
Maximum None.
Suitable Lump sums.
Money back At end of term or when you die. Most bonds can be cashed early but you lose some of your money.
Interest Fixed 'income'. Some companies pay higher rates for larger amounts, e.g. over £20,000, £50,000.
Interest paid With Income Bonds yearly or monthly; by cheque to you or direct to a bank account. With Growth Bonds the'income' is accumulated.
Tax The 'income' whether paid out or accumulated comes tax paid for basic rate and 10% taxpayers. Non-taxpayers and 10% taxpayers cannot reclaim the tax. Higher rate taxpayers have to pay extra, either each year if the 'income' is more than 5% of the original cost, or when the Bond matures or on death. If on maturity or surrender the full amount invested is not repaid, the loss can be set against the growth or income, to reduce any higher rate tax payable. The income or proceeds of a Bond may reduce someone's entitlement to Age Allowance.
Fees to pay None.
Passbook Insurance policy issued.
Children Unsuitable.
Risk There is a risk of capital loss if the stockmarkets do not perform as required. If you cash the bond early, you stand to lose even more. UK authorised life companies are covered by a 90% compensation scheme less 'excessive' benefits. Don't invest in a Bond offered by an overseas life company which is not authorised in the UK as your protection is less and your income or growth could be liable to UK basic as well as higher rate tax.
How to invest Look out for limited offers which arrive through the post or are advertised in the Saturday and Sunday financial pages of the newspapers.
Where from From an independent financial adviser or direct from a life company.
Other forms of investment
type Life Insurance
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Last updated 2 April 2003