Standalone products can offer more comprehensive coverage than bundled ones

ICICI Bank recently offered a complimentary critical illness cover of Rs 1,00,000 from ICICI Lombard General Insurance to its customers if they open a fixed deposit of Rs 2-3 lakh for at least two years. Customers aged between 18 and 50 will enjoy this cover on 33 critical illnesses. Sounds good? It does. Many more products offer complimentary insurance. Credit card and savings account holders get bundled personal accident covers. Some mutual fund houses offer life insurance if you start a systematic investment plan (SIP) for the long-term.

Should one go for these products just because they come with free insurance? “One needs to be careful. These products are typically created to ensure that customers do not switch from one investment to another quickly,” says Anil Rego, founder and CEO, Right Horizons. Here are some of the questions you need to ask: If a mutual fund offers life cover of 100 times the SIP amount, then a SIP of Rs 10,000 will fetch a cover of Rs 10 lakh. As a rule of thumb, one should have life cover equal to 10-15 times the annual income. If we conservatively assume that the person investing Rs 10,000 per month has a monthly income of Rs 50,000 (annual income of Rs 6 lakh), then he needs Rs 60-90 lakh worth of life cover. “Both the amount of cover being offered and the underlying features of the insurance product need to be evaluated against other competing products available before making a decision,” says Vishal Dhawan, founder and CEO, Plan Ahead Wealth Advisors.

Sometimes, the free personal accident cover makes a payout only in case of death due to accident and not in case of a permanent disability. This significantly reduces its usefulness.

Most free covers are offered as group covers. The insurer protects its downside by offering the cover to a relatively younger group. So, many such covers end when the insured crosses the age of 50. An individual’s insurance needs, especially health-related, actually increase with age.

Buying a fresh cover at 50 becomes both expensive and difficult. Health covers purchased at that age may come with a waiting period. The person would have been better off relying on a separate health cover purchased at a young age. “Bundled products add value only when there is no catch. For instance, if a health cover is offered, it should not have the pre-existing disease clause, but that is hard to come by. The insurance cover should continue even when one exits the product,” says Rego.  

Most of our insurance needs hover around the family. All family members, for instance, need health cover, which is why we opt for family floaters. When an insurance cover is offered free with an investment product, it usually covers only the individual. Even in the case of joint applicants, the cover is generally restricted to the first applicant only.

What if the underlying product is discontinued? What if the underlying product continues but the core benefit it offers is no more attractive? For example, you may have invested in a mutual fund SIP because the fund’s returns were good. But what if its performance falters? What if the product manufacturer and the insurer decide to end the coverage?

The catch in free covers

• Sum insured may be insufficient
• Cover may be only for the investor and not his family members
• Insurance cover may end as soon as he exits the product
• Cover may be free for a limited period and become chargeable later
• You may be unable to exit the investment product despite its poor performance because you need the insurance

If any of these possibilities materialise, then either you have to live with a poor investment product because you need the insurance cover, or you may have to look for a new cover in case the insurance coverage stops. Both are not good situations to be in. “In case one has to redeem or exit from the product earlier than originally planned, the insurance cover may also be lost. Also, the add-on cover may be free of cost for only a limited period and could become chargeable subsequently,” says Dhawan.

Sometimes, these products can be useful. An individual who is unable to purchase a life cover as he is not able to meet the stringent medical underwriting norms may get a cover through such products as group platforms have less strict underwriting norms.

The bottom line: You are better off buying a few covers on your own rather than relying on a free ride.