Pros & cons of free life insurance cover with SIPs
Mutual fund houses have been offering a free add-on feature of life insurance cover to investors who invest through SIPs of select mutual fund schemes. The amount of life insurance cover offered depends on the amount of monthly SIP investment made by the investor, so higher the SIP amount, higher the life insurance cover. This combination of investment and life insurance certainly looks like an attractive investment proposition for the investors as the life insurance cover is offered as a freebie by the mutual fund houses. But, as they say, there is no free lunch and so there are pros and cons of investing in such schemes. Let us take a look at the features of the scheme and how it works for the investors.
The insurance cover is available to investors whose minimum age is 18 years and maximum age is 51 years at the time of payment of the first instalment of the scheme. The insurance cover ceases to exist when the investor crosses the maximum age limit specified by the fund house. Also, the SIP should be for a minimum period of three years or more to avail the insurance cover.
The quantum of insurance cover depends on the number of years the investor has been investing in the scheme. The insurance cover is 10 times the monthly SIP instalment during the first year, 50 times during the second year and 100 times in the third ear, subject to the maximum cover specified by the fund house. Hence, if an investor is investing Rs 10,000 per month in a scheme through SIP, the life insurance cover will be Rs 1 lakh for the first year, Rs 5 lakh for the second year and Rs 10 lakh for the third year and thereafter.
If an investor discontinues the SIP or withdraws fully or partially before the end of three years, the insurance cover ceases immediately. However, if the investor stops payment of SIP instalment after three years, the insurance cover will remain in force and the sum assured will be equivalent to the value of the accumulated units, subject to the maximum limit specified by the fund house.
The advantage of the scheme offering life insurance cover is that it comes free of cost, so it is virtually a bonus and an incentive for the investor to join the scheme and remain invested for a minimum period of three years. The insurance cover offers financial protection to the nominees of the insured in the event of the death of the insured.
The biggest demerit of this add-on feature is that there are very few schemes offering such insurance cover, so the choice of schemes is limited. Also, the insurance cover is provided only to the first applicant and it is not available to the second and third applicant in case of joint holding. Besides, the insurance claim has to be settled with the insurance company directly and the mutual fund house is not involved in the settlement process.