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SIP-linked insurance : Should you go for it?

We demystify the SIPs flavoured with insurance seasoning

SIP-linked insurance : Should you go for it?

To give investors a celebratory meal, a few fund houses have been providing a rather unique offering to your investment plates. It is the provision of 'free' life insurance cover embedded in your mutual fund SIPs. The underlying concept here is the same as normal SIPs, with the only difference being that along with getting returns from your investment, you get an added benefit of a free life cover. However, the free life cover so provided is subject to various terms and conditions, which differ with fund houses. But is such a product suitable for a retail investor? Let's find out!

What is the product?
The SIP plus insurance combination provides a life insurance facility on starting an SIP under the designated schemes available for this option. In order to avail the insurance cover, one has to stay invested for a minimum of three years.

Who is eligible?
This facility is available to every investor between the age of 18 to 51 years at the time of investment. The continuity of the insurance cover, however, is capped up to the age of 55-60 years, depending on the fund house, after which it will expire irrespective of whether you continue to stay invested or not. No medical check-ups are required and all the expenses related to the insurance cover are borne by the fund house.

Is there any hidden cost?
There are no additional costs associated to the life cover. But some fund houses levy an extra exit load if you redeem the fund before three years.

How much insurance do you get?
The life cover offered in these products is lower in the initial years of SIP tenure. To be specific, the insurance cover is a multiple of your SIP instalment, which is set as 10 times in year one, 50 times in year two and 100-120 times after the three-year period. However, the maximum coverage in any case will not exceed Rs 50 lakh.

For example: A monthly SIP of Rs 20,000 will get you a life cover of Rs 2 lakh in the first year, Rs 10 lakh in the second year, and a sum assured of Rs 20-24 lakh third year onwards.

What if you redeem or stop your SIP?
You need to continue your SIP for at least three years or else you end up losing your life cover. Your insurance will also lapse if you exit the fund partially or in full before the SIP tenure or on attaining the maximum specified age. If you stop your SIP after three years, the insurance cover stays but is limited to the lower of fund value at start of each policy year or the maximum insurance cap of Rs 50 lakh. To illustrate, let's continue with our previous example. Let's say your Rs 20,000 monthly SIP grows to Rs 8.5 lakh by the end of the third year. At this point, if you stop investing more, your life cover will reduce from Rs 20 lakh to the actual fund value, i.e., Rs. 8.5 lakh.

So what's the verdict?
Like most other freebies that come your way, this is also good to have but don't let it drive your investment decision. Your choice of a mutual fund scheme should depend upon its suitability to your goals and your time horizon, its performance record and the consistency of the fund manager.

You can't depend on the insurance cover you get here simply because your insurance lasts only till you stay invested in the fund. Over the long term, the fund may lose its investment worthiness, prompting you to switch. Or it may no longer be a suitable vehicle as your investment horizon shortens. In such cases, staying invested for the fear of losing your insurance will not do any good to your finances.
Therefore, you must buy a term cover of an adequate amount separately and not get lured into buying a fund simply for the charm of free insurance.