Moneycontrol PRO
Upcoming Event:Attend Algo Convention Live, 2 Days & 12+ Speakers at best offer Rs.999/-, exclusive for Moneycontrol Pro subscribers. Register now!

Bundling insurance with mutual fund SIPs may not be a good idea

Insurance covers may be attractive when bundled with mutual funds, but shouldn’t be decisive.

March 28, 2019 / 10:15 AM IST

Khyati Dharamsi

Combo offers look good because they give us an impression of things coming cheap. The financial space is no different. Insurance companies are only too happy to bundle investment plans into their insurance policies and have been offering unit-linked insurance plans.

Mutual funds now aim to take it back by offering insurance plans with mutual fund schemes. As the inflows into equity funds have been slowing, fund houses are resorting to the “free insurance” sales pitch to attract more investors.

This tax-saving season, DHFL Pramerica Asset Managers (DPAM), jumped on to the “no-hidden cost insurance” bandwagon, wherein investors aging 18-51 years, who opt for a minimum of 3-year systematic investment plan (SIP) in select schemes, would be offered a free-insurance cover.

What’s on offer?

Close

In a plain vanilla SIP, you invest a sum of money every month and your fund house invests your money in equity or bond markets based on your scheme’s objective.

In an insurance with SIP package, you get a term life cover that is bundled with your investments. Here, if the primary or first unit holder dies then the nominee gets the sum assured, while the secondary holder doesn’t get the insurance cover.

Though the insurance cover increases during the first, second and third year of SIP investment, it is actually yours only if you continue the SIP for three consecutive years.

For instance, DHFL Pramerica allows 20 times cover of the monthly SIP contribution for its 1-year SIP, 75 times for second year and 120 times the monthly SIP contribution worth of insurance cover for its 3-year SIP. Even if you discontinue the SIP after the third year, the insurance cover would remain intact.

For fund houses, an SIP insurance scheme also acts as a means to attract more investors. The hope of the mutual fund industry is that such a free insurance offer would encourage SIP investors to opt for a longer tenor.

As Ajit Menon, CEO, DHFL Pramerica MF explains, “As far as equity is concerned, spending time in the market is essential for it to be able to generate returns of the magnitude commonly attributed to equity. SMART SIP is simply incentivizing the investor further. The insurance cover provided increases with increase in the tenure of the SIP.

Talking about the benefits Menon adds, “By offering insurance free of cost, the idea is to encourage investors to start the habit of regular savings, thereby eliminating the need to time the market. Secondly, it helps the investor in ensuring that his financial goals are well funded, even if some unfortunate event happens with the investor.”

The maximum insurance cover that all such bundled plans give you is of a sum of Rs 50 lakh. Even if you were to invest across various schemes within the same fund house, you will get a maximum life insurance cover of Rs 50 lakh.

Further, the ‘Declaration of Good Health’ mandate too has been done away with for this group insurance scheme offered by DPAM. While most such insurance with SIP offers come with an initial 45-day no coverage clause, DPAM initiates your insurance cover as soon as you invest.

Different plans, different covers

Before you jump to enrol for a SIP that comes with an insurance cover, check the extent of cover you’ll get.

DPAM is offering a sum assured of 20, 75, 120 times the monthly SIP investment amount for 1-year, 2-year and 3-year SIPs, respectively. Others offer 10 times to 120 times (of the monthly SIP amount) cover .

SIP and insurance Mar 27 2019

Let us work out the math for the highest coverage multiple for 3-years SIP of 120 times, which is also offered by most of the fund houses.

The average SIP amount for Indian mutual fund investors during financial year 2018-19 has been Rs 3,125 per SIP account, as per the Association of Mutual Funds of India, as per its February 2019 data. If you opt for the three year plan, you are eligible for a term life insurance cover of Rs 3.75 lakh (120 x Rs 3,125 of monthly SIP).

You might think the cover is for free since fund houses aren’t charging anything extra from you, atleast visibly. Your monthly SIP contribution is the only thing you pay every month.

Think again. SIPs that come bundled with the insurance feature, impose higher exit loads of up to 2% to deter pre-mature withdrawals, as opposed to the normal 1% for withdrawals made within a year.

If one were to purchase an insurance cover for that amount, it would cost an average of Rs 1,200-1,800 (a 35-year old male policyholder), based on the age and other parameters, which is borne by the mutual fund house currently.

Suresh Sadagopan, founder of Ladder 7 Financial Advisories, says, “Such term cover would be available for a couple of thousands if you buy a standalone term life cover. Hence, the insurance feature should not determine the scheme selection process for an investor. Investors should not invest in a scheme purely for the life insurance cover.

Instead, look at a scheme’s historical performance versus its own benchmark index and peers, your financial goals and asset allocation, your own risk profile and your schemes’ and then decide which scheme you should invest in.”

Even for the maximum sum assured offered of Rs 50 lakh the premium- or more specifically, your monthly SIP instalment- would be around Rs 6,200-17,600 based on the age and other factors. One would have to clock in a SIP instalment of Rs 50,000 per month to actually get the benefit of Rs 50 lakh insurance cover; which may not be a good thing for you to do if the SIP doesn’t meet your financial goal.

Insurance Sufficiency

Those who haven’t purchased an insurance cover might be tempted to test the insurance waters or visa-versa with first time mutual fund investors. But investment and insurance needs are best kept separate.

As Vivek Damani, founder of financial advisory Jeevan Prabandhan points out, “The offer of free insurance on mutual fund SIP may leave one in a situation of under insurance if they do not have any other term insurance plan based on their need. With the average SIP size being in the range of Rs 3,500 per month in a folio, that would translate to an insurance cover of Rs 5-6 lakh and one needs to question whether the same is sufficient.”

What Damani means is that when investors invest in mutual funds, they first decide how much money they would like to invest and then settle for an insurance cover that comes along with it. And then based on this insurance cover, it’s possible that investors may not opt for any additional insurance cover, despite the existing cover inadequate.

Experts recommend an insurance cover of 10 times of the annual income as a thumb rule. “Ideally one should take into account the financial stability, dependency of the family, the type of job held and the liabilities,” Damani adds.

Cover discontinuance

The risk with an insurance cover of this kind also is that there are chances of the cover being discontinued due to many reasons – some technical and others linked. Firstly, if you do not continue the SIP for a minimum 3-years or for the tenure you have opted for in certain cases, the insurance cover would be void.

Also, there are many other conditions that have been laid in the fine print. Any partial or full withdrawal or even switch outs from the mutual fund scheme before the completion of three years would make the insurance cover cease (see table above).

“Since a switch is also considered a redemption in the current scheme, the insurance cover would seize. However, you could use this facility in the scheme to which you have switched to already,” Menon clarifies.

Aditya Birla Sun Life AMC specifies that a default of 2 consecutive SIP instalments or a total of 4 defaults can lead to cessation of cover. “In the long run you cannot depend on this type of insurance cover completely as the cover may be discontinued if you either stop investing or withdraw the money before the mandatory 3-year period,” warns Damani.

Those who outgrow the 55-year bar (60-years for Aditya Birla Sun Life AMC) too would be left without an insurance cover as these group insurance plans offered by the mutual fund houses would be discontinued at that age. A standalone term insurance cover is available up to the ages of 70-75.

Moneycontrol take

If the scheme that is offering an additional insurance cover fits within your objective and the product is comparable with peers then there is no harm in opting for the insurance cover. But the insurance cover should not be a decisive factor.

Damani elaborates: “The main objective of investing in a scheme gets defeated if the scheme doesn’t perform with the market. The insurance offered is nominal and doesn’t offer much protection except as an additional cover, which isn’t sufficient by itself. Consider the insurance as a bonus and not a reason in itself to either invest in a scheme or stick around despite of underperformance.”

(The author is a freelancer writer.)



Download your money calendar for 2022-23 here and keep your dates with your moneybox, investments, taxes

Moneycontrol Contributor
first published: Mar 28, 2019 10:15 am
Sections
ISO 27001 - BSI Assurance Mark