Investment bonds offer a way for investors to diversify their portfolio by buying into a pool that typically reaps rewards from the investments made by the bond seller. A 2-year investment bond provides returns to investors who leave their money in the investment vehicle for the entire period. The best rates for 2-year investment bonds can run from 4.5 to 7percent. Insurance companies sell most investment bonds with rates tied to their performance.
History
The investment bond is sometimes referred to as an insurance bond. The product originated as a life-insurance policy that allowed investors to share in the profits made by the insurance company. A bondholder looks for insurance companies in which to put the participant's money and pay out according to the profit margins obtained by that company over a 2-year period. The insurance company pools all the bonds together to make their own investments in municipal bonds, stocks and real estate. Insurance companies have grown to diversify their own bond offerings, since investors have more options in which to place their profits, including individual retirement accounts.
Significance
While the investment in bonds can be tax-deferred, the commission rate for sellers of investment bonds runs about 7 percent. Two-year bonds should be evaluated for their previous performance to offset these fees. Investors receive access to a wide range of otherwise unavailable opportunities through the investment bond, and the insurance companies pay the capital-gains taxes on the bond-pool profits.
Types
Typical investment bonds carry penalties for early withdrawal, while some can provide a steady stream of income throughout the life of the bond agreement. Like most other investments, the rate of interest changes as the company performance ebbs and flows. Rates once promised at the purchase of the bond are subject to change, and often do. Shopping around for the best rates on 2-year investment bonds can be done directly online or through a financial adviser, who charges additional fees or commissions.
Considerations
Investment bonds are more popular with European investors looking for tax shelters. In the United States, while some investors include 2-year investment bonds in a diverse portfolio, they are not used as widely for major pieces of a growth investment portfolio. Many U.S. investors find the best 2-year investment bond options through insurance companies in Europe to increase their own diversification.
Benefits
The benefits of an investment or insurance bond often outweigh the possible lower return. The profits can be rolled over to continued investment in the same vehicle, or to other accounts.
