Who does not like freebies? Most of us get attracted to offers like ‘buy two, get one free’, even if such offers are extended to financial products. Here’s the latest entrant. Now, you will get insurance free on investing in some mutual fund schemes.
Fund houses like ICICI Prudential Mutual Fund, Reliance Capital Asset Management Company and Birla SunLife Mutual Fund, have been rolling out insurance-wrapped funds. ICICI Prudential Mutual Fund launched the SIP (systematic investment plan) Insure a few months ago. Reliance Capital Asset Management Company and Birla Sun Life Mutual Fund had launched similar products last year.
Under insurance-linked funds, the asset management company offers group term insurance cover to mutual fund investors. The facility is available to all investors in a few select funds till the last SIP instalment or 55 years of age, whichever is earlier. Investors do not have to pay premium for this cover.
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Many like Priyadarshini Menon, a media professional from Mumbai, seem excited. “I may not be gaining anything from it, but I am not losing either,” she said.
But financial planners warn against these. “One should never mix an insurance product with an investment product. Just because you are getting free insurance, does not mean you buy the product,” said Suresh Sadagopan, a certified financial planner.
For one, the cover being offered will be small, as it is a group insurance plan. These schemes offer a cover of up to Rs 10 lakh only. So, in spite of opting for this facility, you will require a pure term plan offering a higher cover, depending on your need. Also, a group term policy is not as efficient as individual ones with regard to servicing.
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“The insurance cover will be used to pay the SIP amount in case the investor dies,” explained a fund manager, whose company offers an insurance-wrapped product. This means the investor’s family does not get the insurance fund on his/her death. These are structured in a way to pay out about 50-100 times the SIP amount only after an investor stays invested in the fund for two to three years. The insurance cover will lapse if the investor survives the term of SIP or he/she redeems the investment.
The insurance cover has an initial waiting period of 60-90 days, but in case of accidental death, the waiting period is not applicable. It does not cover death due to pre-existing illness.
Fund houses say these are long-term savings instruments. As a result, they levy an exit load of up to two per cent 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 withdraws the investment before the end of the SIP tenure, the exit load will be levied.
This is an expensive proposition compared to other funds. If, for instance, you need money urgently and you have to redeem, you lose the advantage of insurance, explained Sumeet Vaid, CEO, Ffreedom Financial Planners.
Another issue with the insurance-linked fund is that the feature is not available on all of the schemes of the fund house. Take the case of ICICI Prudential’s product, insurance is available on 16 of the fund house’s equity schemes. The feature is available on 17 equity schemes of Reliance Capital AMC. And, not all these schemes may be the best performing ones.
Peerless Mutual Fund is also planning to offer this product, even for lump sum investment. “This option will make the product more attractive,’’ feels Akshay Gupta, its CEO. He insists that mutual funds with insurance cover are more efficient than Ulips because there is no upfront charge.
“Something as important as insurance should not come bundled. Mutual fund plus insurance cannot replace insurance. In case of a claim where will the investors go, to the insurance company or the fund house?” asks Vaid.