Bond Insurance is a type of credit enhancement where an issuer essentially pays money to increase the credit rating on its bonds. Through a bond insurance policy, an insurance company agrees to pay principal and interest on the insured bonds if the issuer defaults. The issuer’s lower bond rating on the issue prior to insurance is thus upgraded to the insurance company’s higher claims-paying rating (analogous to a bond rating). The premium the issuer pays to the insurance company is offset by the reduced bond interest the issuer pays to bondholders due to the enhanced credit rating.