IPTM1420 - Types of insurance policy used for investment: guaranteed income bonds, guaranteed growth bonds and indexed bonds

Guaranteed income bonds

The ITTOIA/S504 (7) definition of ’guaranteed income bond contract’ merely adopts the regulatory definition of classes of insurance business – life and annuity business, and linked long term business, excluding annuity contracts and pension business. In ICTA the phrase guaranteed income bond’ is not used; the reference is to ’relevant life insurance policy’.

The description is one used by the insurance industry to describe a product that can be made up in a number of ways. It may comprise a single life assurance policy or several, and these may be combined with a life annuity. The intention of the income bond package is to provide what looks from the customer’s point of view like an income each year, actually based on surrenders, part surrenders, or individual cluster policy maturities, and a return of capital on maturity of the bond. Humorists have suggested the use of the phrase reflects Voltaire’s view of the Holy Roman Empire.

The significance of the guaranteed income bond legislation lies in identifying types of payments under the contract that meet the conditions described at IPTM3550.

Guaranteed growth bonds

There are also ’guaranteed growth bonds’, where the benefits are accrued and paid out when the bond matures.

In both cases the benefits are fixed at inception, subject to the detailed policy terms, and in that respect ’guaranteed’. Some guaranteed bonds offer the better of the investors’ money back, or its indexed return, and market performance, but with a cap.

Indexed bonds and others

Other types of bond may, for example, have returns linked to stock market indices.

It is a feature of life-based contracts that they are extremely flexible.