Free life insurance with MF SIP: Should you buy if you are looking for life cover?

The raging Covid-19 pandemic has made many look for increased life insurance and health insurance covers. Higher insurance protection means higher premium outgo, which investors often have difficulty paying. But what if life insurance comes free with a mutual fund scheme? It has both investment and insurance packaged into one. But should you opt for it? Generally financial planners advise keeping investments and life insurance separate.

Here are a few points you should keep in mind when you come across such offers:

Insurance with SIP

Mutual fund houses such as ICICI Prudential, Aditya Birla Sun Life, Axis, Nippon Life and Prudential Global Investment Managers (PGIM) offer free life insurance for investors who commit to systematic investment plans (SIP). The idea is to make investors commit for long term SIP. The coverage is linked to the SIP amount. For example if you commit to invest Rs 5,000 per month for next three years, then the life insurance cover is pegged at say 100 times. It means in case of death of the investors during the currency of the SIP, the nominee will be paid a sum of Rs 5 lakh.

In some cases the sum assured is progressive. In the first year it could be 100 times the monthly SIP amount and in the second year it may become 110 times and may get capped at say 120 times. Some fund houses keep the sum assured equal to the total amount to be invested in the equity fund.

Charges and conditions

The mutual funds do not charge the investors for these covers. The premium is paid by the asset management company. Though the premium is not specifically charged to the net asset value of the scheme, since it is paid out of profits of the mutual funds, it is indirectly paid for by the investors.

Since this is a group life insurance policy, the mutual fund house is master policy holder and suicide is typically excluded in the first year of coverage. The cover ceases if the SIP is stopped and there is a maximum cover ceasing age- around 55 years, irrespective of you wanting to continue with the SIP. “While the upper age limit of 55 years is not low, it cannot be considered as adequate as well,” Amol Joshi, founder, PlanRupee Investment Services said.

Only with select schemes

Life insurance is not available with all schemes. Most fund houses offer it with select equity schemes. Bond funds as well index funds are excluded. You have to check the minimum SIP amount and the minimum SIP term prescribed by the fund house to be eligible for the life insurance cover.

Consider your insurance needs

Since insurance is an added benefit, it is a good feature to have. But do not invest in a scheme just because it has insurance cover with it. Most of the schemes that come with insurance cover are equity funds and you need to have a long term view and risk appetite to invest in them. Do not buy these schemes with an investment time frame of less than five years. Invest in line with your financial goals. “Buying any specific AMC SIP just for insurance is not a good idea. Investors must consider whether the cover is adequate and whether the plan meets their investment objective,” Joshi said.

The term plan alternative

Though SIP in equity funds can build wealth for you in the long term, do not count on them for life insurance. Even if you are putting up Rs 10,000 per month, the life insurance cover won’t cross Rs 10-12 lakh. That is a meagre number. If you can invest Rs 10,000 per month, your insurance need must be far higher. Buy a term life insurance cover for the right amount, also buy add on to make the cover comprehensive. “In a standalone term plan, one can choose an amount that is adequate. Also, term plans are the cheapest forms of insurance. Also, a standard term insurance plan will not be affected by any break in your investments (SIP),” Joshi pointed out.