What Is Bond Insurance?

Bond insurance is a policy a bond issuer buys that agrees to repay the principal and all associated interest payments to the bondholders in the event of default. Bond issuers buy insurance to improve their credit rating and decrease the amount of interest that they need to pay.

While an insurance bond can be used for investment purposes, it’s intended to be purchased as an alternative to a traditional life insurance policy. Like other bonds, when the term ends, the investor receives it along with the money that it has earned over the course of that term. Usually, insurance bonds are required to be at least 10 years in term, and are often 20 to 30 years.

How Does It Work?

First, investors or the policy holder makes a payment to the insurance company for the insurance bond. Next, the company places this payment into a specific fund. Like other funds, a team of investors takes the payment and uses it to buy certain shares of stock. In this case, they generally choose dependable stock that’s expected to rise steadily over a long period of time. When the bond matures, the investor receives the payment again, along with the earnings it has gained over the years. The insurance company charges fees for taking care of the fund and issuing the bond.

Why Use an Insurance Bond?

Depending on the insurance bond, there might be tax benefits to making the long-term investment. Some insurance companies agree to pay the taxes that are charged against the earnings the bond makes, giving the investor a superior deal, while other companies may require the investor to pay taxes when the bond matures. Either way, taxes are delayed. This is one reason some choose to use insurance bonds as more of an investment than a life insurance policy.

How Do I Shop for Bonds?

We can help! Call  916-773-3800 to speak with an ISU representative.