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Should you opt for mutual funds with free insurance cover?

If the scheme performs well and helps an investors reach his financial goal and the fund house is giving him free insurance till he continues his SIPs, there's no harm in buying insurance-wrapped funds. But there is an exit load on premature withdrawals

September 06, 2012 12:26 IST | India Infoline News Service

Fund houses like ICICI Prudential Mutual Fund, Reliance Capital Asset Management Company and Birla Sun Life Mutual Fund have been launching insurance-wrapped funds.


ICICI Pru MF introduced Systematic Investment Plan Insure facility (SIP Insure) in selected schemes in May 2012. SIP Insure is an optional feature in addition to SIP. A group life insurance cover shall be provided under this facility by a life insurance company. The premium for providing such cover shall be borne by ICICI Prudential AMC. The minimum installment will be Rs. 1,000 for all schemes except ICICI Prudential Tax Plan for which the minimum amount is Rs. 500. Maximum age up to which SIP Insure is available is 55 years.


Reliance’s SIP Insure facility is an add on feature of life insurance cover under group term insurance to individual investors opting for SIP in select schemes. The facility provides free life insurance cover to investors at no extra cost. In the unfortunate event of the demise of an investor during the tenure of the SIP, the insurance cover will take care of the unpaid installments. Thus, the nominee would be able to continue in the scheme without having to make any further contribution, according to the information mentioned on the AMC website.


Birla Sun Life MF’s Century SIP as the name suggests gives an investor cover of up to 100 times your monthly SIP. Under the Century SIP option, if the investor makes monthly SIP installments, the insurance cover for the first year will be 10 times the SIP amount and in the second year it will go up to 50 times and 100 times from third year onwards, subject to a minimum SIP installment of Rs. 1,000 and maximum cover of Rs. 20 lakh per investor.


Under these insurance-linked funds, the AMC offers group term insurance cover to mutual fund investors. The facility is available to all investors in a few select schemes till the last SIP installment or 55 years of age, whichever is earlier. The insurance cover will be used to pay the SIP amount in case the investor dies. Investors do not have to pay premium for this cover since the coverage being offered will be small in size and is a group life insurance cover.


Merits

  • Free life insurance cover
  • Investors don’t have to pay premium for life cover
  • Insurance cover to pay SIP if investor dies

The investor’s family/nominee does not get the insurance fund on the death of the insured. These insurance-wrapped funds are designed to pay out 50-100 times the SIP amount only after an investor invests in the scheme for two to three years. The insurance cover will lapse if the investor survives the term of SIP or if he redeems the investment. The insurance cover has an initial waiting period of 60-90 days. In case of accidental death, the waiting period is not applicable. It does not cover death due to pre-existing illness.


Pankaaj Maalde, head-financial planning, ApnaPaisa.com, said, “SIP insure is nothing but a life insurance cover given with the monthly SIP investment in mutual fund. The insurance cover offered is not individual cover but its group insurance cover subject to maximum cover of Rs. 20 lakh in case of ICICI and Rs. 10 lakh in other cases which may not be suffice for life cover. Hence, an investor would still require a pure term plan offering an adequate cover depending on his financial needs. A group term policy is not as efficient as individual ones with regard to servicing. If you stop paying then the cover stops and there are exit load also in some cases.” 


The schemes have an exit load of up to 2% if the investor redeems, discontinues or defaults before the SIP matures or before completing 55 years of age, whichever is earlier. In case of the death of the investor, if the nominee redeems the scheme before the end of the SIP tenure, the exit load will be levied. These insurance-wrapped funds don’t charge any upfront charge. However in case of claim, it is not clear whether the investor should approach the insurer or the AMC?


Demerits

  • Offered in select schemes
  • Limited insurance cover
  • Insurance cover has an initial waiting period of 60-90 days
  • Exit load of up to 2%

Maalde added, “As a matter of principle we strongly advise our clients against mixing investment and insurance. The major drawbacks in SIP insure is risk cover stops in case of withdrawal or switch (partial or full). Investor may have to book partial profit to switch to debt or may have to withdraw fund for any goal. If risk cover stops in such situations then it has no meaning.”


“There is nothing wrong in selecting the SIP insure facility as long as the decision is made purely based on the merits of the mutual fund. Just because this facility offers an insurance cover, the mutual fund should not be selected. Consider it more of an added feature rather than a core functionality being offered. But for better insurance cover, one must stick to term insurance plans,” Deepak Yohannan, CEO, MyInsuranceClub, said.

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