Due Diligence. Look before you leap into SIP insurance

Asset Management Companies (AMCs) such as Aditya Birla Sun Life, ICICI Prudential and Reliance offer free term life insurance cover to SIP investors in select schemes.

In the unfortunate event of the demise of the unit holder, the insurance cover will compensate the nominee with a sum calculated based on the monthly instalment.

Here is a low-down on the features of these schemes and whether it is worth signing up for one.

Aditya Birla Sun Life (Century SIP), ICICI Prudential (SIP Plus), and Reliance Mutual Fund (SIP Insure) provide life cover as an add-on facility to their SIP investors.

For instance, Reliance Mutual Fund (MF) offers this cover for Reliance Growth, Reliance Vision, Reliance Tax Saver and Reliance Retirement funds while Aditya Birla Sun Life MF provides cover for all its equity and equity-oriented balanced funds. ICICI Pru MF extends the benefit to its open ended equity oriented funds. The life insurance cover provided is free of cost to the investor and the premium is borne by the AMCs.

The terms and conditions of these plans across AMCs are almost similar.

The SIP has to be registered for at least three years to be eligible for insurance cover. It is available for individuals aged above 18 years and not more than 51 years, at the time of the first investment. Only the first unit holder will be covered under the insurance. Insurance cover will be stopped immediately if the SIP is discontinued any time before three years.

In case of death of the unit holder during the first year, the insurance cover will be 10 times the monthly SIP instalment amount. The cover goes up to 50 times if he dies during the second year. If the demise happens from the third year onwards, the nominee will receive 100/120 times the monthly instalment amount.

However, the above mentioned limits are subject to a maximum cover of ₹20 lakh in ICICI, Rs 21 lakh in Reliance and 25 lakh in Aditya Birla MF SIPs per investor, across all schemes.

If the SIP is discontinued after three years and the invested amount left with the AMC, the insurance cover will be equivalent to the market value of units. Hence, the nominee will receive the insured amount along with the fund value (subject to a maximum cover of ₹20/21/25 lakh of the respective AMCs).

The insurance cover shall cease on the unit holder attaining 55 years of age (60 years in case of Aditya Birla SIP) or end of the tenure mentioned. Partial or full redemption/switch-out or default in two consecutive SIP instalments will also lead to termination of the life cover.

The insurance is covered under ‘Group Term Insurance’ plans provided by the life insurance companies. In case of death of the applicant, the nominee has to file a claim directly with the insurance company and the payment of the claim will be credited in the bank account of the nominee by the insurance company. The AMC will not entertain any request for claims.

Data shared by mutual fund companies shows that the claim settlement ratio has been almost 100 per cent with ICICI Pru AMC; it has settled all 11 claims received so far since launch. Reliance AMC has settled over 340 claims so far amounting to ₹14.3 crore. Aditya Birla MF has settled over 272 claims so far amounting to around ₹4 crore.

The attraction with SIP insurance is that you get the cover free of cost. If the cover is offered with schemes that have a solid track record of performance across market cycles, it could be a good thing to have.

But it is not a wise idea to start the SIP just to get the free insurance if the schemes are not among the best performers.

If you focus on getting an insurance cover and settle for a sub-par scheme, it may take a toll on your wealth-building for other long-term needs when you are alive.

In both cases though, there are restrictions. First, there are rules on when and how you can opt for SIP insurance. This feature can be signed up for, only at the time of starting SIP. You cannot avail this facility if your SIP registration is done through online mode such as AMC websites (barring Aditya Birla MF which provides online facility through ISIP), MF Utility and other online portals.

Besides, if you discontinue the scheme before three years, the cover will not be available. An exit load is also applicable. So if you want to stop SIPs because fund performance is not up to the mark, you may be constrained.

It is definitely not a good idea to throw good money after bad just because you want the insurance cover, and you may end up doing just that. This apart, if you discontinue after three years but leave the money with the AMC, only the market value of the investment is payable to your nominee if you pass away.

If the market does badly during the time of the claim, the sum assured could decimate. Even if the market has done very well and your fund’s performance has been top-of-the class, the sum assured still has an upper limit.

Thus, the add-on life cover provided along with the SIP may not always be the best choice. While it can be complementary, it is certainly not a substitute to your life cover requirement. You have to buy term insurance plan separately which should cover at least 10 times your annual income. Term plans are the best option to cover your life at low cost.

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