Free Insurance: Watch out for the catch

For consumers, freebies are always welcome, be it a packet of chips with a bottle of shampoo, or a music system with a car. The insurance space too operates no differently. For instance, mutual fund schemes come with free life insurance cover, credit cards and home loans come with free personal accident policies and new cars come with zero insurance. If you are planning to purchase such a policy, keep in mind the various parameters that you need to take into consideration before signing on the dotted line.

Reliance and Birla are two major fund houses offering insurance bundled with mutual funds. Under such schemes, typically, you invest under a list of specified schemes through the SIP (Systematic Investment Plan) mode. In the event that you die before the expiry of the scheduled investment period, the insurance cover is activated, i.e. the sum assured, which is equal to the balance SIPs, is invested in the same fund chosen by the insured, in the nominee’s name. Obviously, you do not have to pay any premiums for the life cover, usually provided under a group insurance scheme. Redemption under such mutual fund-cum-insurance schemes, however, may not be as simple as that in a regular fund. For instance, there could be additional costs, in terms of higher exit loads within the no-exit period.
During festivals and sometimes during periods of low sales, car dealers dole out free car insurance offers. In most cases, these schemes are valid for one year. How such schemes work is that when car manufacturers or dealers want to offer discounts, they offer free insurance cover. Such covers are, however, restricted only to mandatory car insurance coverage. If you are interested in going in for such a policy, don’t forget to scrutinise the policy document and ask for the detailed policy wordings. For instance, keep an eye on the IDV (Insured Declared Value) – this should not be lower than 15 to 20 per cent of the invoice value.

Also, check how the dealer will pay for the second year’s insurance coverage if it is free, as car insurance policies are renewed yearly. Also, ask for the breakup of the car registration fee, as some dealers may charge a higher registration fee to camouflage a free insurance offer.

Several credit card issuers and banks offer accident cover along with the cards, wherein the company buys a group cover for the purpose and the user pays no premium for the cover. The structure and claim process for such accident covers is mostly similar to that of a regular personal accident policy from a non-life insurer. In the event of the holder’s death, a lump sum is paid to the nominee. Such covers could come with permanent disability riders too, to provide financial assistance to the insured if he/she meets with a serious mishap. However, the policy may not cover loss of wages in case the policyholder is temporarily incapacitated and is not able to resume work. One major issue with such covers is that you become dependent on the bank because of the cover.

It is important to remember that while the idea of insurance to fulfill a goal even in your absence seems attractive, you also need to ascertain whether the insurance cover is commensurate with your current liabilities and dependants’ future needs. An overall term cover is much more comprehensive and easy to keep track of while evaluating your life insurance needs. One school of thought is that it is a good idea to separate your insurance needs from your investment portfolio.

In reality, there are no free lunches – the company or the intermediary ultimately charges you in some way, or else, reduces the cover. Hence, while making a decision, you should ensure that you focus on the merits of the main product itself.