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Is a mutual fund SIP with insurance cover useful?

Author: Kumar Shankar Roy/Wednesday, June 27, 2018/Categories: Mutual Funds, Expert View

Is a mutual fund SIP with insurance cover useful?

Post Budget 2018, Unit Linked Investment Plans or ULIPs, essentially a combination of investment and insurance, are said to be more tax efficient than equity mutual funds. This is why mutual fund’s own combination product ‘life insurance with SIP’ (Systematic Investment Plan) is now coming to the fore. Yes, some mutual fund companies offer investors free life insurance cover in case of a Systematic Investment Plan or SIP. At present, ICICI Prudential Mutual Fund offers insurance with SIP in form of SIP Plus. Reliance Mutual Fund offers it as SIP Insure, while Aditya Birla Mutual Fund calls its product Century SIP. The life insurance cover value or sum assured is linked to the value and tenure of the SIP. To the investor, this kind of a product comes free of cost as the cost of life insurance is borne by the mutual fund. Let us see how these products are actually useful.

With a maximum life cover of Rs 25-50 lakh per investor, SIP plus insurance is not a bad deal for investors. This is especially true because the investor does not pay a single paise for the cost of insurance. No medical test is required for insurance. All resident individual/NRI applicants aged above 18 years and not more than 51 years, at the time of the first investment can get such insurance. Do remember the insurance cover continues up to the age of 55-60 years (as on the renewal date).

The first / sole unit holder will be covered under the insurance. All you have to do is provide an SIP tenure of three years or 36 months to be eligible for this insurance coverage. In the first year, your life cover will be 10 times the monthly SIP installment. In Year 2, 50 times the monthly SIP installment will be the sum assured or life cover. Year 3 onwards, the life cover will be 100-120 times the monthly SIP installment. In case of death of the applicant, his/her legal representatives or nominee will have to file a claim directly with the life insurance company with all the relevant documents.

For example, an investor does a monthly SIP of Rs 10,000 for five years in a fund. If he/she dies after a period of 3 years, then his/her sum assured= 100-120 times x monthly sip installment = 100/120 X 10, 000 = Rs 10-12 lakh. This amount will be credited to the nominee's bank account directly by the insurance company, in the event of the death of the unit holder or investor. Reliance MF website shows no insurance cover shall be admissible in respect of the death of the SIP Insure unit holder on account of either death due to suicide or death within 45 days from the commencement of SIP installments except for death due to an accident. Aditya Birla MF's facility covers accidental deaths for the first 45 days. In case of ICICI Pru MF, the group insurance cover shall not extend to cover instances of death due to suicide in the first year of cover.

If SIP insurance registration discontinues before three years, insurance cover stops immediately. In case this is discontinued after three years, the insurance cover would be equivalent to the value of units allotted at the valuation as on the 1st business day of the month in which renewal confirmation is given, subject to a maximum of 100-120 times of the monthly installment.

Let us take a detailed look at the pros and cons of SIP insurance facility.

Firstly, an insurance policy with SIP is basically a play on providing a form of life insurance coverage if investors do SIPs. Companies want to increase the incentive of investors continuing the SIP. So, insurance acts as a carrot to stay beyond 36 months.

Secondly, a mutual SIP does not always immediately give you returns but life insurance can. Since good returns come in the long term, many investors often wonder what will happen to their SIP. Giving an insurance policy gives investors something tangible right from the word go. This is a classic example of instant gratification.

Thirdly, mutual fund houses take the responsibility of life insurance policies for the investors. They opt for group insurance, which makes it cheaper for the fund house. The mortality charge of the insurance policy is the cost of insurance and that is paid by the fund house. So, for an investor, it's virtually free insurance and if they go for higher systematic investment plans, the insurance cover rises.

Do remember there are certain demerits as well. First, the life cover facility compels you to do SIPs for longer periods of 36 months, even if you don't want to. This is both good as well as bad. For SIPs to work, they should be long term. But if the market keeps on correcting in a secular fashion, SIPs will not work their magic.

Second, buying this SIP insurance in a bid to get total protection is not a smart move. Life insurance should be taken by calculating human life value. Investments form only a fraction of a human life value. A SIP insurance life policy covers only a multiple of your monthly SIP. Ideally, insurance should be taken on a multiple (10-20 times) of annual income.

Thirdly, doing mutual fund SIPs are an investment decision. Returns generated from the mutual fund are the main objective of investing, not free insurance. So, as an investor, you should concerned about the fund strategy, the fund’s track record, fund manager consistency and risk-adjusted return strategy. Treat the simple life cover just as an added benefit.

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Kumar Shankar Roy
Kumar Shankar  Roy

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