Mutual Funds with Insurance Cover: is it worth the buy?

Mutual Funds with Insurance Cover

Investment and insurance are two of the most basic financial needs which individuals have. That is why they invest in relevant avenues for fulfilling these needs. The need of investment is best fulfilled by mutual funds which provide market linked returns while at the same time diversifying the investment risks. The need of insurance, on the other hand, is fulfilled by life insurance products which promise to compensate for the financial loss suffered in case of premature death. But what if these two needs are combined in one product? Are both the needs fulfilled sufficiently?

 

Mutual funds with insurance cover

 

Recently, a new variant of mutual fund schemes have been introduced in the financial market. These schemes promise insurance coverage along with investment returns. The investor invests a particular amount every month through SIP and a multiple of the SIP amount is offered as the sum assured. If the investor dies during the investment period, the sum assured is paid in lump sum along with the value of investments. Many mutual fund houses have come up with such a product which is slowly gaining prominence in the market.

 

Benefits of the scheme

 

Mutual funds which also offer an inbuilt insurance coverage promise the following benefit –

 

  • They provide two-in-one benefit of insurance cover as well as investment returns
  • Insurance cover is usually provided free of cost
  • The lump sum benefit paid on death is over and above the invested amount. This gives the family financial assistance when the investor dies

 

Who can buy the scheme and why?

 

Investors looking to avail something extra from their mutual fund investments can buy this scheme. They would be investing for market linked returns while at the same time they can enjoy a free insurance coverage. This would allow them not only to fulfil their investment goals, but to also come closer to their insurance goals as well

 

Is the scheme worth the buy?

 

While the advantage of free insurance coverage definitely makes one sit up and take notice of these innovative mutual fund schemes, the question still persists – are both investment and insurance needs fulfilled sufficiently?

 

While the investment need is fulfilled, fulfillment of insurance needs is another matter altogether. Here’s why –

 

  • Limited coverage

 

Insurance need is fulfilled only when the sum assured is sufficient enough to provide financial security to the family in the absence of the bread-winner. Though the above-mentioned mutual fund schemes do provide insurance cover, the coverage is limited. There is a maximum limit to the sum assured which investors can avail under these schemes. This limited coverage option does not sufficiently fulfilll the insurance need of the investor.

 

  • Limited tenure

 

Coverage under these mutual fund schemes run only till the investor invests in the scheme. In case of redemption, the coverage also stops and so the coverage under the schemes is limited. Insurance coverage is, however, required for a longer tenure so that the risk of premature death can be covered until older ages.

 

  • Inflexible coverage

 

Another problem with mutual fund schemes offering insurance coverage is that the coverage is fixed. Investors cannot customise or increase their coverage by adding optional riders. Life insurance plans, on the other hand, allow individuals to customise their coverage as per their requirements and are, therefore, more suited to fulfilling the insurance needs of policyholders.

 

What should be done?

 

Investments and insurance are two separate needs which should not be substituted for one another. So, educate your customers to choose mutual funds for their investments but not seek insurance protection from such investments. If the fund is offering the cover, the cover should be considered as an added advantage and not as a means to fulfill their insurance requirements. For insurance, individuals should invest in a good term insurance plan which would give them the freedom to choose the desired coverage level, additional riders and also longer coverage tenures. So, help your customers understand the difference between mutual funds and insurance plans so that each product can be picked for what it does best.

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