Insurance option making SIPs more attractive for investors

With the Securities Exchange Board of India (Sebi) gone for categorisation of mutual funds (MF) in India, the scope for innovation in the product offering has risen. Earlier, fund managers used to deviate a bit from the fund objective to generate additional returns for the fund by assuming calculated risks.

But now the fund houses have limited leeway in bettering the fund performance other than prudent investing techniques within the defined category. With tweaking of base product not possible, the variety of product offerings has increased and also in the value-add of these simple products. One such offering is to provide life insurance cover to the investor, albeit with conditions. 

No, these products are not competitors to Unit Linked Insurance Plans offered by the life insurance companies. These are now being offered by the mutual fund houses of select funds on Systematic Investment Plan (SIP) with tenure of particular periods as desired by the fund houses.

Though, the additional insurance cover can’t be called free (as per the Insurance Regulatory and Development Authority, IRDA) but is provided with “no” additional cost to the investors in these funds, the terms and conditions of which would vary from each fund house. So, simply it’s an additional benefit for the investor to gain more than just returns by investing a SIP in a certain fund for a specific period. 

One common condition across the fund houses is that to enjoy the insurance cover, the investor should stay invested in a SIP of a defined fund for at least three years. The cover is extended from age groups of 18 through 51 at the beginning of the investment. The insurance cover beyond the age up to 60 is at the discretionary of the fund house. The insurance cover however, seizes beyond these stipulated age limits irrespective of the investor staying invested or not in the fund. 

The beauty is that, to avail this insurance benefit, the investor needn’t go through any medical tests to certify their health and all the expenses towards providing the insurance cover would be borne by the fund house itself. There are no additional costs associated to provide the life cover in-built or otherwise for the investor in the fund. There could however, be exit loads levied if one redeems the fund before the three-year period. 

The insurance cover is often a multiple of the SIP amount being contributed with lower multiples in the initial years and increasing as the tenure of the contribution goes. The set limit are 10 times the first year, 50 times the second year and 100-120 times over three years of the initial SIP contribution amount with a maximum coverage not exceeding Rs 50 lakh per investor in that fund. So, a SIP of 30K for three years would get the investor with a cover of Rs 3 lakh in first year, Rs 15 lakh in second year and Rs 30 lakh (up to 45L) from third year onwards.

The pre-condition to enjoy the insurance cover is to continue to invest in the SIP for at least three years. The cover lapses in case of withdrawal either partial or full within the three years of SIP. The coverage continues but limited to the lower of fund value at the start of each policy year i.e.

SIP anniversary or the maximum cap of Rs 50 lakh in case of SIP being stopped post three years. To understand this condition better, continuing the earlier example the 30K SIP for three years, assume that the fund value at the end of three years at 14.5 lakh. The fund ideally would cover due to the set multiple at 30 lakh but upon stopping the SIP, the cover would reduce to the actual fund value of 14.5 lakh. 

So, is this a reliable source of insurance cover for an investor. It’s an emphatic no, considering that the dynamic uses of SIP, an investor could access to the funds at any time during or post the contribution of SIP. Also, the contribution to the SIP i.e. both the amount and tenure is dependent on the goals and/or timelines but certainly not for the freebies. 

From the fund house point of view, this offering is a way of imbibing discipline and/or rewarding the disciplined investor. Also, it could deter at least a few of the investors from taking knee-jerk actions due to the market vagaries. Going back to where we started, with the performance enhancements restricted, this is a very good ploy by the fund houses to retain the investors into their funds especially at those times when the lags a bit during a brief lean phase. 

Aditya Birla Sun Life had a feature for a very long time called “Century SIP”, where the investors were provided with insurance cover and it was then a unique proposition for the investors opting them for. Now, with the commoditisation many other fund houses have begun to offer this. Overall, it’s certainly an added benefit for the investor but this feature shouldn’t be a reason to opt for any SIP.  (The author is a co-founder of “Wealocity”, a wealth management firm and could be reached at knk@wealocity.com)