You may be buying a mutual fund, but don’t be surprised if you get an insurance policy as a free gift!

Three mutual fund houses — ICICI Prudential, Birla Sun Life and Reliance Mutual Fund — are offering a free life insurance cover for customers entering into an SIP (systematic investment plan). So, if the investor unfortunately passes away, his nominee will get a lump sum amount without having to actually redeem the fund.

Recently, ICICI Securities too announced an offer of a medical insurance policy — critical illness cover plus accident insurance to customers of ICICIDirect who sign up for an SIP. Here, the sum insured is equal to the value of the investment committed through the SIP. Say, the investor commits to an SIP of Rs 5,000 every month for five years, his sum insured would be Rs 3 lakh (5,000*12*5). So, the investor can be assured that in dire times, he can make a claim on the policy that tags along with his investment product and get his capital back.

While the offer from mutual funds is free, the one from ICICIDirect has additional costs. This apart, the more important question is: Are these offers as good as they appear?

The life insurance cover from mutual funds is an optional feature. The investor can decide whether he wants to take it or not. Mostly all equity and hybrid schemes from the three fund houses mentioned above have this option.

Spokes in the wheel

Though medical test is not mandatory, disclosure of pre-existing diseases is required. The sum insured is calculated based on the SIP instalment amount. With Birla Sun Life and ICICI Prudential, the first year sum insured is 10 times the monthly SIP amount. This increases to 50 times in the second year and is 100 times the instalment amount from the third year. In Reliance, the sum insured is calculated differently. Here, it is equal to the sum of unpaid instalments at the time of demise of the investor. But, the amount of sum insured will not be given to the nominee, it will be used to continue the SIP. The fund house will invest the amount in the same scheme in the name of the nominee.

The insurance covers from these mutual funds are genuinely free. Fund houses pay for it from their kitty. But, there is a catch here.

First, considering that SIPs are generally small sums of money running into a few thousands at best, the insurance cover as a multiple of the SIP amount offered is low. Plus, there is a cap on the maximum cover. In the Reliance Mutual Fund scheme, the maximum cover given is only Rs 10 lakh while the other fund houses give cover for Rs 20 lakh. Given that an individual’s life insurance cover should be at least 10 times his annual income, the cover offered by these policies may not suffice. Thirdly, there is a minimum SIP period of three years in all cases. Discontinuing the SIP during this period will result in termination of the insurance cover. Also, the cover will automatically stand cancelled as the individual attains age of 55 years. So, if you rely solely on life covers from these schemes, you may be at risk.

Finally, some fund houses reduce the sum insured on the policy when the SIP is discontinued after the minimum mandated period. Also, the cover will cease to exist if one makes a partial or full redemption of the fund at any time.

Less for more

The insurance cover from ICICI Securities is a little different from what mutual funds offer. Fund houses give a sum insured that is a multiple of the SIP instalment and it may or may not be equal to the total amount committed towards investment. With ICICI Securities, the sum insured is the total amount committed for investment by the individual and you are free to make a choice of the fund and scheme in which you want to invest. The cover is only for claim on critical illness (about nine of them are defined) or accidental death and not a life cover. So, what’s the cost of this medical cover? Assuming the total value committed through the SIP is Rs 5 lakh over a three-year period, the premium for the insurance cover for a 35-year-old male is Rs 316 per month or Rs 3,792 per year. Critical illness policies in the market for the same person can be bought at Rs 1,500-1,800 annual premium with 15-20 illnesses covered.

So, when insurance comes bundled with other products, watch out! It may not be a great idea as it may be low on cover with limits on the maximum coverage. Premiums may also be high. Read the fine print on the policy document before you sign it. At best, bundled insurance schemes can only be a supplement and not a standalone insurance policy.

>rajalakshmi.sivam@thehindu.co.in

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