Mutual funds have undergone tremendous changes in recent years. They have evolved and have become more investor-friendly. Affordable SIPs, no entry load, minimal or no exit load, good returns, diversified asset portfolio, etc. are some of the common benefits which mutual fund investments provide to investors. To add to these benefits, modern day mutual funds are also bundling their investment schemes with insurance coverage. Let’s understand what these investment-cum-insurance schemes offer –
Mutual funds with insurance coverage
Mutual fund houses have come up with new mutual fund schemes which offer insurance coverage along with investment returns. The coverage depends on the value of the SIP installment that is paid by the investor. The sum assured is expressed as a multiple of the monthly SIP amount. For instance, if the coverage is 100 times the SIP amount and the SIP is INR 1000/month, the insurance coverage would be allowed for a sum assured of INR 1 lakh. The coverage would continue till you redeem the scheme fully or partially.
Is the coverage under such schemes optimal?
Though insurance with mutual fund investments sounds like a good deal, when you look at the big picture, the scheme is not all that beneficial. Though the coverage is offered, the disadvantages of such coverage are as follows –
- The sum assured is not optimal. Even if the SIP installment is high, there is a limit to the sum assured which can be availed under the scheme. This limit on coverage limits the sum assured which is required to ensure sufficient insurance coverage
- The coverage continues only until you hold your investments in the mutual fund scheme. As soon as you redeem the scheme completely, the coverage would stop. Similarly, in case of partial redemption of the scheme, the coverage might reduce which would again provide a very low insurance coverage
- There are no additional riders to opt under such schemes. Basic term insurance coverage is provided under these mutual fund schemes. Such coverage is standard, rigid and cannot be customized to suit individual insurance requirements.
What is the solution?
Insurance and investment are two specific financial needs which are better fulfilled when they are done independently. Combining these two needs often results in half measures and such half-measures do not fulfill these two needs sufficiently. Though the mutual fund schemes with insurance cover provide something extra, they cannot be substituted for insurance. Planning for life insurance needs should be done separately. Individuals should invest in a good term insurance plan with long coverage tenure and a high sum assured level for their family’s financial protection in their absence. Once the insurance need is taken care of, these mutual fund schemes can be chosen for investment returns. The insurance coverage that these schemes provide should be considered to be a bonus. This coverage should be viewed to supplement the existing coverage bought under a good term insurance plan.
So, the next time your clients talk about mutual fund schemes offering insurance coverage, educate them about the insufficiency of such a cover. Tell them that the coverage is an added feature and that a term insurance plan should not be missed. It is a good option to invest in such mutual fund schemes when your clients already have sufficient life coverage. But foregoing a term plan in favor of these mutual fund schemes should be avoided at all costs. Investment and insurance are two different products and they should be treated so.
