Most doctors would be using at least one or two different investment structures for asset protection and tax planning purposes. Typically this would be a family trust and/or superannuation fund.
However, there is another useful structure that most doctors would not have heard of before.
In this article, I will be exploring ‘investment bonds’ for doctors (or insurance bonds) in more detail. Please also refer to this comprehensive Moneysmart page on insurance bonds, where I sourced some of the information used in this article.
What is an investment bond?
Investment bonds (or insurance bonds) are technically life insurance policies, which means that you need to nominate a life insured and a beneficiary.
They have similarities with other types of investments: – they are a long-term investment like superannuation; – they have features similar to a managed fund, but with elements of an insurance policy.
Investment bonds can be a tax effective option for long-term investors who have a marginal tax rate higher than 30%, which would be almost every doctor. Any income or capital gains are taxed in the bond itself, and so this does not add to your personal tax return.
However, the catch is that you should hold the bond for at least 10 years, because if you access the funds before that time (which is perfectly allowed), there will be personal tax consequences for the investor. After 10 years, any withdrawals are tax-free.
You can make additional contributions over the life of the insurance bond, although you should not contribute more than 125% of your previous year’s contribution, or it will reset the 10-year term.
Most investment bonds offer investment options such as cash, fixed interest, shares, property or a range of diversified investment options.
What are the benefits of an investment bond?
Let’s have a look at some of the particular benefits investment bonds offer.
As a form of life insurance, investment bonds can enjoy special protections from creditors. Basically, both the bond and the proceeds received from it may be protected from creditors. The extent of the protection is unlimited and is similar to the protection superannuation offers.
As already highlighted, the tax is limit to 30% within the bond itself, and the effective tax rate can be lower, if you factor in franking credits for example. Where superannuation is not an option for long-term investment, then investment bonds might be an alternative for doctors on a high tax rate. They basically allow you to accumulate tax-free lump sums for major life events such as school fees and home deposits for children for example.
Estate planning benefits
Insurance bonds may also provide useful estate planning opportunities. One of the most important benefits is that you can bypass the estate and achieve more certainty.
When setting up an investment bond, you need to nominate a policy owner, a life or lives to be insured and beneficiaries. The policy owner or investor may be the same as the life insured.
When the last insured person passes away, the beneficiary receives the proceeds from the insurance bond tax-free. If there is no nominated beneficiary, the proceeds will go to the policy owner or their estate.
Most investment bonds also offer a child advancement policy where ownership of the policy can be transferred to a child when they reach a nominated age. This can be a tax effective way to save for a child’s future.
Summary – investment bonds for doctors
Investment bonds are not well known, but they can be particularly useful for doctors given the specific benefits they offer. In addition to the benefits mentioned, they can also be borrowed against if needed.
About Yves Schoof
I specialise in managing and coordinating the financial affairs of medical professionals and have been recognised as one of the best financial planners in Australia. I am a Certified Financial Planner and member of the Financial Planning Association of Australia.
As I understand your time is extremely valuable and scarce, I am able to offer flexible meetings times, including outside business hours and during the weekend. I can even come and meet you somewhere convenient, or talk via videoconference on Skype.
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Yves Schoof and Affluence Private Wealth are Authorised Representatives of Synchron, AFS Licence No. 243313. The information posted is intended to be general in nature and is not personal financial product advice. It does not take into account your objectives, financial situation or needs. Before acting on any information, you should consider the appropriateness of the information provided and the nature of the relevant financial product having regard to your objectives, financial situation and needs. In particular, you should seek independent financial advice and read the relevant product disclosure statement (PDS) or other offer document prior to making a decision.
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