SIP with insurance not as good as a life cover

Combining a systematic investment plan with an insurance cover may seem convenient and lucrative. But do not choose such schemes based solely on your insurance needs

OF LATE, several fund houses have come up with mutual fund-cum-insurance schemes which are billed as MFs' answer to unit-linked insurance plans (ULIPs).
    In addition to the standard benefits of systematic investment plans (SIPs), these schemes promise an insurance cover where the sum insured is the unpaid committed amount over the duration chosen by the investor. For example, if an investor has opted for an SIP of Rs 10,000 per month for 10 years in 'X' scheme of a mutual fund and he/she passes away after investing regularly for three years, the insurance company will make good the balance payment of Rs 8,40,000 [Rs 10,000 x (12 months x 7 years = 84].
    This amount will be typically invested in the same mutual fund scheme and will remain invested till the tenure chosen by the investor ends. Post this period, the money will be made available to the nominee. Although there is an option of withdrawing the amount earlier, an exit load will come into play. Apart from the aforesaid exaple, there is a similar scheme in the market wherein the sum assured could amount to 10 to 100 times of the monthly installment (10 times if the investor dies within one year of starting the SIP and 100 times if he/she passes away after three years).
    "While the insurance covers such schemes offer does not count for much cover when one considers the total cover necessary for a family, it definitely serves the purpose of mental accounting for the investor," said PARK Financial Advisors director Swapnil Pawar. Simply put, the investor can rest assured that a certain number of SIP investments will happen irrespective of his/her living through the term.
    According to Aditya Apte, partner with investment advisory firm The Tipping Point, a reason why investors could consider opting for such schemes is that MFs do not charge any additional fee/charges for this facility; the cost of the insurance is borne by the asset management company from its management fees. However, given a choice between existing MF schemes with an insurance add-on and new schemes with an insurance component, it's better to go for the former as they have a proven track record, he feels.
    The insurance component certainly makes such schemes look attractive, especially when they are compared with ULIPs. However, experts caution against investing in such schemes with the sole criterion of the insurance add-on in mind. "Ideally, the performance of a mutual fund scheme should be the only driving factor in selecting it. Just because the fund now has an insurance add-on may lead some investors to opt for it instead of better-performing funds. This is an unnecessary opportunity cost because by decoupling his/her insurance and investment needs, the investor could have got better returns and the same cover," feels Mr Pawar.
    Your assessment of your insurance needs should be independent of your investment decisions. Under no circumstances should the investor assume that these schemes serve the same purpose as the usual insurance cover as the insurance add-ons are offered under a group life insurance scheme and are not customisable to suit an individual's needs.
    Mr Apte argues that even though the insurance component is offered free of cost, the AMC incurs an expense towards the cover, that is, the management fee charged to the scheme is utilised for providing the cover. Therefore, theoretically, one could argue that had the insurance cover not been included in the scheme, the AMC could have passed on the savings to the unit holders via a lower management fee charge.
    Experts feel that such schemes are best suited to investors who want to ensure the completion of their financial plans even in case of their death. "Middle-income families that do not have an access to a qualified financial advisor can opt for these schemes, especially for building a corpus for long-term goals like retirement or children's education. They would do well to ensure that the goal target corpus is insured and also linked to equity markets," suggests Mr Pawar.
    "This type of scheme could be beneficial to all classes of investors who are using the SIP route to make investments, though high net-worth investors would not find the same very appealing as the total amount which can be paid out as insurance is typically limited to around Rs 10- Rs 20 lakh," adds Mr Apte.
    The bottomline is that such schemes shouldn't be construed as MFs' answer to ULIPs; any decision regarding investing in these schemes should be taken solely on the basis of their performance potential.