Should You Go For SIP With Insurance Cover?
The idea of getting the benefits of both mutual fund and insurance in one product interested almost everyone and in no time AMCs introduced SIP with insurance. DSIJ explains what is SIP with insurance and is it worth investing in?
People have still not got over the reintroduction of LTCG (Long Term Capital Gains) tax on equity and equity-oriented mutual funds. ULIPs (Unit Linked Insurance Plans), which were spared from any tax, are being sold by insurance companies and agents, which highlights the tax benefits of ULIPs over mutual funds. However, there are some AMCs (Asset Management Companies) that have started giving term insurance cover on select mutual funds. The cover is directly proportional to the monthly SIP investments made by the investor. This insurance cover is technically free. You do not have to pay any additional premium to avail this facility. The premium for such insurance cover is funded by AMCs. Let us dive deep to understand the product and whether or not you should opt for such product.
What does SIP with insurance cover mean?
Some of the AMCs have started providing term life insurance cover to investors who are investing through SIPs. They do come with certain terms and conditions, such as the insurance being a group insurance cover and not an individual cover and the tenure of the SIP must be at least 36 months and it is only available on investment in select mutual funds. The cover starts after a waiting period of 45 days, except for accidental death. There is also age criteria applicable to this feature. Investors who are aged above 18 years, but not more than 51 years at the time of first investment would be eligible for the insurance cover. Once the investor attains the the maximum age as prescribed by the fund house, the cover automatically ceases to exist.
How does it work?
Once you start the SIP in the fund offering term life insurance facility, the sum assured would be 10 times of the SIP in the first year, 50 times in the second year and 100 times third year onwards. The sum assured provided under this facility comes with the ceiling. The ceiling on the life cover is the total of all the existing investments in SIP linked insurance schemes with respective AMCs, subject to maximum of Rs. 25 lakh in case of Birla SL and Rs. 50 lakh in case of ICICI Pru AMC and Reliance AMC.
Let us take an example to understand this better. We assume that you are doing SIP of Rs. 25,000 every month in one eligible mutual fund of all the three AMCs. Your cover is illustrated in the following table.
From the above table, we can compute the life cover you would get for SIP of Rs. 25,000 p.m. In the above example, Birla SL Century SIP has reached its maximum limit. However, in the case of ICICI Pru SIP Plus and Reliance SIP Insure, the maximum limit of life cover is Rs. 50 lakh and this can be attained with an additional SIP of Rs. 25,000.
Requirements
Anyone who is 18 years of age or more but less than 51 years of age is eligible for term life insurance facility. In case there are joint or multiple holders in a mutual fund scheme, then by default only the first unitholder’s life would be covered. No medical assessment is required, but investors require to provide declaration of good health.
Insurance
Life insurance is a term insurance cover. However, it is to be remembered that this is not an individual term insurance, rather it is a group term insurance, where the mortality charges are borne by the fund house. The life insurance company would directly pay the death claims to the nominee without any involvement of AMCs.
Limits
The maximum limit of term life insurance cover varies across AMCs and these limits consider all the schemes, plans and folios together. The maximum life insurance cover provided by Birla SL Century SIP, ICICI Pru SIP Plus and Reliance SIP Insure are Rs. 25 lakh, Rs. 50 lakh and Rs. 50 lakh, respectively. There is also maximum limit on tenure of insurance coverage. For Birla SL Century SIP, it is 60 years, for ICICI Pru SIP Plus and Reliance SIP Insure it is 55 years. One may opt for perpetual SIP, but the insurance cover ceases to exist post the maximum limit on tenure of insurance coverage.
Exit, discontinuance of SIP and withdrawal
If one wishes to stop SIP in-between, then one can do so as there is no compulsion on continuance of SIP till the end of the tenure. If the SIP is discontinued before three years, then the insurance cover ceases to exist as well as it would attract exit load. If you exit before one year, then the exit load is 2 per cent of the applicable NAV, if you redeem after one year but before three years, then the exit load is 1 per cent of the applicable NAV. After three years, there is no exit load. This holds true only in case of Birla SL Century SIP. However, in case of funds offered by ICICI Prudential and Reliance, it's according to the respective mutual fund schemes. However, in case of partial or full withdrawals of units purchased before completion of the mandated SIP tenure/instalments or till attaining 55 years of age in case of ICICI Pru SIP Plus and Reliance SIP Insure and 60 years of age for Birla SL Century SIP, whichever is earlier, or discontinuance of SIP before 3 years, the insurance cover would cease to exist.
Advantages
One of the biggest advantage of SIP with insurance is that the mutual fund provides investors with a free group term life insurance cover at no extra cost. This may also bring some discipline among the investors who neither do SIP nor are properly insured. With this add-on, the nominee of the investor would get the sum assured along with the investments.
Disadvantages
Not all mutual fund schemes are eligible to get this add-on life insurance cover facility. Also, you have a limited choice in terms of fund selection. In case there is a death claim to be made or settled, then the AMCs do not provide any support in this regard. You have to get it settled directly from the insurance company. The insurance coverage available is only limited to the first account holder, joint or multiple account holders are not eligible for insurance coverage.
How it compares with ULIP
In addition to SIP with insurance, the other product that offers both insurance and investment together is ULIPs (Unit Linked Insurance Plans). Both these products provide insurance along with investment. SIP with insurance does lag behind ULIPs when it comes to insurance. Let us take an example to understand this. In ULIP, monthly premium of Rs. 1,000 will fetch you an insurance cover of approximately Rs. 4.5 lakh (depending upon your age and term) and with Rs. 1,000 SIP in your mutual fund will get you cover of Rs. 1 lakh and that too, from third year onwards. The sum assured remains the same throughout the term in case of ULIP, but in case of SIP with insurance it varies for the first 3 years and after that, it remains constant. When it comes to investment part, SIP is going to perform better due to lower fund management charges that helps you create a good amount of corpus over a long-term.
Nonetheless, our advice will be to keep insurance and investment separate and the best option is to take a pure term insurance plan and invest the rest in mutual funds with a long-term view.
* ELSS (Equity Linked Saving Scheme) having lock-in period of 3 years and is also eligible for tax deduction under section 80C of Income Tax Act, 1961 upto Rs. 1.5 lakhs.
So Should You Go For It?
Now the moot question is: Should you go for SIP with insurance? Just investing because it is providing free life cover is not the right way to look at investment.
Apart from this additional feature, it is also important to check the performance track of the fund, fund managers consistency, risk-adjusted returns of the funds, etc. Ideally, it is recommended for an individual to have insurance cover which is at least 20 times his or her annual income. Suppose your annual income is Rs. 5 lakh, then the ideal insurance cover that you require is Rs. 1 crore. However, the maximum insurance cover you can have with SIP with insurance is Rs. 50 lakh in the case of ICICI Pru SIP Plus and Reliance SIP Insure. However, in case of Birla Sun Life Century SIP the insurance cover is limited upto Rs. 25 lakh.
Hence, you would be under-insured to the extent of Rs. 50-75 lakh. Further, not all mutual fund schemes are eligible for the insurance facility and there are very few options to choose from. It is to be remembered that the insurance cover ceases to exist even if you make any partial withdrawal. It is always better to keep your insurance and investments separate instead of mixing them. If you wish to avail this facility, then make sure you are at least 80 to 90 per cent insured and avail this facility only as a top-up. Remember, if you are availing this facility and the invested fund is not performing on expected line, it is advisable to exit from it. Do not keep on investing just for the sake of free insurance.