Deemed Income from Life Insurance Products Regarded as Managed Investments

Deemed life insurance products

The following life insurance products are regarded as managed investments and hence are subject to deeming provisions:

• unbundled insurance policies - universal life plans,
• insurance bonds,
• friendly society bonds, and
• savings plan equivalents.

Unbundled insurance policies - universal life plans

Unbundled insurance policies are also known as universal life plans. These policies separate:

• life insurance cover, and
• savings or investment elements.

Generally, the policy owner can:

• select the desired ratio of cover to investment, and
• vary this ratio from time to time.

Unlike conventional policies, where bonuses are paid out of the life insurance company surplus, returns on the investment element of unbundled policies are paid out of a separate investment account or portfolio.    

Insurance bonds

Insurance bonds are essentially investment products, however, because they are marketed by life offices and regulated under the Insurance Contracts Act, they:

• are in the form of life insurance contracts, and
• use insurance terminology, such as:

• 'bonuses' or 'reversionary bonuses', referring to returns on the investment,
• 'premiums', referring to amounts invested,
• 'life insured', and
• 'policy owner'.

They are offered by:

• life offices, and
• banks which have a life office subsidiary.

Insurance bonds may also be known as:

• investment bonds,
• savings plans,
• assurance certificates, and
• single premium insurance policies.

Friendly society bonds

Friendly society bonds:

• are similar to insurance bonds,
• are investment products not life cover arrangements,
• use terminology similar to that in insurance bonds, and
• are offered by friendly societies, most of which are based in Victoria.

Friendly societies are regulated by state government legislation.

Insurance bonds, friendly society bonds and savings plan equivalents

Insurance bonds, friendly society bonds and savings plan equivalents:

• may be single premium contracts, where the investor:

• makes one contribution, and
• is not committed to making any further contributions, or

• may be savings plans where the investor makes regular contributions during the term of the plan,
• do not distribute income to the investor during the term of the investment,
• may be surrendered by the policy owner for a cash value,
• do not generally provide significant life cover, because the payout is typically only a refund of premiums plus accrued bonuses, and
• are 'tax paid' investments, as the financial institution pays tax on the earnings of the funds before calculating investor's returns, which are not taxed if the bond or savings plan is retained for 10 years or more.