Like most other ethical financial planners do, I too always advise my clients not to mix their insurance needs with their investments, avoid getting into high cost unit linked insurance plans and opt for a pure term insurance and invest the remaining in good investment products.
But, that doesn’t stop insurance companies from coming out with fancy ULIPs regularly, does it? Now, not to be left behind in the race and giving them stiff competition is this growing trend of mutual funds offering free insurance cover with their systematic investment plans or SIPs as they are commonly known as.
How do they differ from ULIPs? Well, a ULIP is meant to be an insurance product, but actually is an insurance cum investment scheme, while the MF SIPs with free insurance are supposed to be investment products, but actually are investment cum insurance products, with the added feature that the insurance cover is “free” J.
Which AMCs currently offer such schemes?
Reliance SIP Insure
Birla Century SIP
Kotak 30 SIP
How do they work?
These SIPs call for a minimum SIP commitment for a fixed number of years (3 years for Reliance and Birla, and 5 years for Kotak). The insurance cover would be equal to the sum total of the SIP amounts for the tenure. For eg. – If I invest 5000 every month for 3 years, I will be covered for an amount of Rs. 1,80,000( 5000 * 12 * 3). It is usually capped at an amount which is a multiple of the monthly SIP amount. There are certain other criteria like a minimum and maximum age etc. The cover would hold good only if the SIP continues for at least the minimum specified period and as long as the funds stay with the fund house.
What are the benefits?
If the investor were to die during the tenure of the SIP, the unpaid instalments are paid by the fund house and the nominee would be eligible to get the entire proceeds after the specified period. And there are no upfront charges for the insurance cover.
What are the limitations and drawbacks?
- Liquidity– The SIPs have a minimum lock in period, and even if exit is allowed there is usually a heavy exit load. So, even if the investor finds that the scheme isn’t performing well compared to its peers, he is forced to continue.
- Limited choice– Currently only a few mutual fund houses are offering such schemes, which may not be the best ones. So, to avail of this insurance facility, one may have to compromise on the possibility of superior returns and settle for the average performers.
- One may need to redeem the mutual fund units sometime in the future to meet some financial requirements. But that would mean losing the insurance cover too. And at that time, it may be too expensive (due to advanced age) or you may be ineligible( owing to health reasons) to make up for this by taking a stand alone insurance policy.
So, long term savings should be the basic motive, and the fund’s track record, consistency and superior returns should be the basic criteria to invest in SIPs. And if they also provide you with an insurance cover without any extra charge, that would be the icing on the cake!