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Should you opt for free insurance with your mutual fund SIP?

, ET Online|
Apr 26, 2018, 10.43 AM IST
The life insurance is in the form of a group term insurance where the mortality charges to provide for the protection is borne by the fund house.
Not many investors are happy with the introduction of the long-term capital gains (LTCG) tax on equity and equity-oriented mutual funds. Taking advantage of this are life insurance companies - they have started campaigns highlighting the benefits unit-linked insurance plans (Ulips) have over equity MFs in the taxation department.

Now, it's the turn of the fund houses to respond and stem the runaway of MF investors to insurance plans. Several investors have started receiving mailers talking about the in-built insurance cover they can get by investing in MFs through systematic investment plans (SIPs). Called by different names, SIP Plus, Century SIP or SIP Insure, such schemes have been there in the market since long but it seems to be making a comeback.

Here's is a look at what they are, how they work, and if you should opt for it.

What is an MF scheme with insurance cover?
Mutual fund houses provide an additional facility of life insurance cover to their investors who invest via SIPs. This is subject to certain conditions like the fact that it will be a group insurance cover and not an individual one. Further, the tenure of the SIP has to be for a minimum tenure of 36 months and the facility would only be available with few select schemes of the fund house.

How it works
Once you have decided on the SIP amount, then life cover in the first, second and third year onwards will be a specific multiple of the SIP amount, which could be 10, 20 and 30 times, respectively. For example, if the monthly SIP is Rs 10,000, the life cover in the 1st, 2nd and 3rd year onwards will be Rs 1 lakh, Rs 2lakh and Rs 3 lakh, respectively.

The table below shows the multiple of the SIP amount for the three schemes.

Life cover in SIP of MF's
Anyone between 18 years and 51 years can enrol for such an insurance facility. In case of multiple holders in a scheme, only the first unit holder will be eligible for the insurance cover. There is no requirement of medical tests but a declaration of good health has to be made. The life insurance is in the form of a group term insurance where the mortality charges to provide for the protection is borne by the fund house. The death claim is to be paid by the life insurance directly to the nominee.

The boundaries
The maximum life cover will vary across fund houses- it can be either Rs 21 lakh, Rs 25 lakh or Rs 50 lakh across all schemes, plans and folios taken together. Also, the maximum age till when the coverage is provided varies as well- it can either be 55 or 60 years of age. There's no upper limit for the SIP tenure. One can also opt for Perpetual SIP, however, the insurance cover ceases when the investor attains 55 or 60 (depending on fund house) years of age or when the committed tenure selected by you reaches maturity.

What if you exit mid-way?
One can stop the SIP anytime and not necessarily run it till the original decided tenure. On exiting after 3 years from the date of allotment of the units, there is no exit load. Within 1 year, the exit load is 2 percent of applicable net asset value (NAV), i.e., of the fund value, and if the units are redeemed after 1 year but up to 3 years from the date of allotment, then 1 percent is the cost that one pays. Partial withdrawals, full exit or stopping of SIP will result in ceasing of the life insurance cover.

What you should do
Not all schemes of the fund house are eligible for the SIP plus insurance facility. If there's a scheme that has been consistently performing well with a good long-term track record, one could consider opting for this facility. If the performance dwindles later on, exit, do not stay invested just for the free insurance. Sector or thematic funds should, however, be avoided.

Do keep in mind that the life cover ceases even in case one makes partial withdrawals. So, one has to carefully enrol for such a facility and link it to a specific long-term goal. Further, the maximum life cover is capped -- most financial planners suggest having a life cover of at least 10 times of one's annual income. Therefore, it's better to keep your insurance and investments separate unless one wants to top up existing coverage.


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