Investment bonds What are investment bonds?

Investment bonds are life insurance policies

The word 'bond' is a source of endless confusion for savers and investors. 

Banks, insurers and investment companies use it to refer to numerous different products, some of which have very little, if anything at all, in common.

Different types of bond

This guide is about investment bonds, but other types of bond include:

  • Corporate bonds – loans that you can make to companies that pay our regular interest. Gilts are similar, only they involve lending to the UK government.
  • Fixed rate bonds – cash savings accounts that offer a fixed rate of interest for a set period of time.
  • Premium bonds – an alternative to cash savings offered by National Savings & Investments. Essentially a monthly prize draw.      

Investment bonds are technically life insurance policies in which you can invest a lump sum. Within a policy, your cash will be invested into a variety of different investment funds. In this sense, investment bonds are a wrapper, a bit like a Stocks and shares Isa.

Run by insurance companies, investment bonds usually offer a range of fund options, including 'life funds' which can invest in shares, corporate bonds or property in a similar way to other types of funds, such as unit trusts

Are investment bonds a good investment?

If you're looking to invest some money, you may be urged by your bank or financial adviser to consider an investment bond. And at first glance, they may appear attractive – they offer growth and the possibility of a regular income. But they can also be expensive, with convoluted charging structures and expensive, often under-performing, fund options.

And although their tax advantages can be useful in some circumstances, investment bonds have become less popular with both investors and financial advisers in recent years.  

Are you ready to invest?

The important thing is to choose the savings or investments products that suit your goals and attitude to risk. And only think about investing in the stock market if you can say yes to all of these questions:

  • Are you free of debt (other than your mortgage)? Debt is expensive and interest is likely to exceed your investment returns.
  • If you have dependents, do you have enough life insurance?
  • Have you protected your income in case you become ill or injured?
  • Have you built up an emergency fund? You need three to six months’ salary in an accessible savings account such as an instant access cash Isa.
  • Do you have a lump sum or surplus cash to invest each month?

If you do decide to invest, consider a range of options and if you are unsure what's right for you, consider taking financial advice.

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Last updated:

March 2016

Updated by:

Michael Trudeau


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