Insurance on SIP worth it?4 min read . Updated: 25 Jan 2019, 02:22 PM IST
- It is prudent to keep your investments and insurance plans separate
- If the SIP is discontinued before three years, the insurance cover stops immediately
Did you know that your systematic investment plan (SIP) could also provide you with an insurance cover? Currently provided by three companies in the market, it is a product that gives you the flavour of equity fund investment along with a free life cover.
“The idea of a SIP Insure insurance cover is that it acts as a bundled product allowing you to systematically save for your long-term financial goal and in the event of an unforeseen circumstance, where the nominee becomes the recipient of a free life insurance cover," says Sundeep Sikka, executive director and chief executive officer, Reliance Mutual Fund. “It is free for the investor and the asset management company bears the cost." says Sikka. “The target consumer for such products is generally any retail investor who is looking to invest in SIPS for their long term goals," said Sikka. Reliance Mutual Fund and Aditya Birla Sun Life AMC Ltd launched it in 2008 whereas ICICI Prudential Mutual Fund launched it in May 2012.
But are these products worth your money?
Here the AMCS bear the cost by taking a group cover which is cheaper and hence you get the insurance cover for free. “The mutual fund companies buy group insurance policies in wholesale for these bundled products. No health check-ups are required in such plans," said Dhirendra Kumar, chief executive officer of Valueresearchonline.com, an online investment advisory platform. In a SIP plus insurance product, an SIP subscriber can begin at the age of 18 and pick select schemes of the chosen AMC to convert it into an SIP combined with an insurance cover. The validity of the bundled insurance cover depends on the age brackets and differs with the companies. The entry age limit is 51 years for all the three companies. The insurance part covers you till you turn 55 in case of ICICI Prudential and 60, in case of Aditya Birla MF. The insurance cover although is only applicable if you do SIP for a minimum of three years. However, in case of Reliance MF, SIP Insure benefit will be applicable from 45 days, that is if the demise of investor happens after 45 days of applying, sum assured will be provided to the registered nominee. There are a few situations where the insurance cover may be denied to you. Partial or full redemption of units before the tenure or till you turn 55 (in case of ICICI Prudential MF and Reliance MF) or 60 (in case of Aditya Birla MF) will lead to cessation of the insurance cover. In cases of a default in three consecutive instalments or five separate occasions, the insurance cover will cease although for Aditya Birla MF the insurance cover ceases if the subscriber has defaulted for two consecutive payments or four separate ones.
“It may seem like there are too many conditions binding the product but considering the life cover is coming for free, such conditions are required to safeguard the product as well otherwise it will bleed, However, the fact that there are too many conditions complicate the product for the investor and makes it less popular," said Deepali Sen, founder of Mumbai-based Srujan Financial Advisers LLP.
In Reliance MF and ICICI Prudential, the minimum instalment is ₹500 and for Aditya Birla MF the minimum instalment varies from scheme to scheme beginning from ₹500.
“For the AMCS it is a case of sticky SIPS because it is unlikely for the SIPS to be discontinued mid-way if it has a life cover attached to it. However, I would advise investors to go for a term plan and not depend just on this one," said Sen.
If the SIP is discontinued before three years, the insurance cover stops immediately. If the SIP is discontinued after three years, you will receive a cover equivalent to the fund value of the units as on the start of the renewal year. This amount is subject to a maximum of 100 times the monthly instalment in case of ICICI Prudential
AMC and Aditya Birla and 120 times in case of Reliance Nippon, capped at ₹50 lakh. All three companies provide a sum insured of 10 times the monthly SIP instalment in the first year, 50 times the monthly SIP instalment and from the third year onwards. While Reliance Nippon offers a cover equivalent to 120 times the monthly SIP instalment, the other two provide it at 100 times the monthly SIP instalment, capped at a maximum of ₹25 lakh for Aditya Birla MF and ₹50 lakh for ICICI Prudential MF.
Should you depend on the life cover?
Taking the example of a 30 year old, living in Mumbai who has started an SIP of ₹10,000 a month. According to the AMC rules, her insurance cover after the third year will become ₹10 lakh. For a separate term cover of ₹10 lakh, premiums can be as low as ₹2,620 annually and range higher up, according to Policybazaar.com.
“Even though you are getting the life cover at such low prices, there may not be any harm in going for such products but you cannot depend just on the life cover provided by the SIP plan," said Kapil Mehta, co-founder of Securenow.in, an insurance web aggregator.
“Since your life cover is dependent on your SIP contributions, the term life cover may not be appropriate according to what you might need", added Mehta.