 "Mixing insurance with investments?")
Financial planners often advice that mixing insurance with investment is a strict no. But in some cases, it may work as well.
No, I haven’t become an insurance agent suddenly. But I am talking about the life insurance being offered by some mutual fund companies, as a free add-on option. These products are being sold to investors who you commit to a Systematic Investment Plan (Sip) of at least three years in those fund houses.
Here is how it works — Let’s say you are 30 years old and are starting off a 300 month SIP of Rs 20,000 per month each in ICICI Prudential Focussed Blue Chip, Birla SunLife Frontline Equity and Reliance Vision Growth. Apart from the fund value in each of these funds, you will get a free life Insurance of Rs 2 lakh in the first year (10 times the SIP value), Rs 10 lakh in the second year (50 times the SIP value) and Rs 20 lakh (100 times the SIP value) from the third year onwards from each of the three fund houses.
This means your total free life cover in the first year will be Rs 6 lakh, Rs 30 lakh in the second year and Rs 60 lakh from the 3rd year onward. In case of death, the investor’s nominee will get the fund value plus the insurance cover value. Every eligible investor (below a certain age around 46 years) will get the life cover irrespective of his/her health status. You are not required to make a good health declaration, so there then can be no claim rejection except if the death is within the first 45 days of starting the SIP or due to suicide. Best of all — the life insurance is genuinely free — the cost is paid by the asset management company from its management fee.
In addition, your returns from the investments remain the same whether you opt for the insurance or not. There are enough provisions to ensure that the insurance cover is not disturbed if there is a cheque bounce of one SIP. Of course, the cover ceases or reduces, if you redeem the investments or stop the SIP or reach the age of 55 years.
So what is the catch? Why are the mutual fund companies offering this free life insurance? There is no catch at all in the scheme. Mutual fund companies wish to promote the concept of regular systematic investments and also wish to incentivise the investor to keep the money invested in the schemes.
The next question that arises is if the scheme is so good why is not so popular despite the one crore SIPs every month, and three leading fund houses are offering this product.
Ideally, insurance should be given automatically if the SIP of a sufficient tenure is started by a person within eligible age in an eligible scheme. Unfortunately, the regulations require an investor to specifically choose this option. Many seasoned mutual fund distributors take care of this for their clients. But the increasing push towards online investments means that few investors are even aware of this benefit. Automatic enrolment of all eligible investors will make this scheme very popular, but it will push up the promotion costs for the mutual fund companies.
The author is a Sebi-registered investment advisor