Securing Financial Products for Free

Receiving gifts from someone you love is definitely exciting. But, how about the excitement when you receive a free gift while buying any new product? Well, nowadays while we often come across offers like buy one get one free, while buying new clothes, such offers have also extended towards financial products as well. Yes. If you choose to invest in mutual funds you can get insurance as a free product. Such commodities are termed as bundled products. At present, fund houses such as ICICI Prudential Mutual Fund, Reliance Capital Asset Management and Aditya Birla Sun Life Mutual Fund among others have been offering  such bundled products.

But the question is how different are these financial products from regular ones? Here is a look:

When one chooses to invest or buy any kind of financial bundled product, insurance is often given free of cost to the investor. The maximum limit of insurance varies from one fund house to another. Such products give investors dual benefits from SIP investments along with free life insurance cover, up to Rs25 lakh. So, it can be said that, while an SIP investment boosts an investor’s savings, the free insurance cover provides the required security. Further, many of these schemes have also started covering a comprehensive list of funds across equity and debt schemes to take care of investors’ asset class balancing needs.

Typically, the catch over here is SIP Insure provides life insurance cover to investors at no extra cost. So, in case of unfortunate demise of an investor during the tenure of the SIP, the insurance cover will take care of the unpaid installments. The benefits lie in the fact that the nominee would be able to continue with the scheme without having to make any further contribution. In such schemes, based on the SIP installment amount, the sum insured is calculated.

This goes up to almost 50 times in the second years and third year onwards it is actually 100 times the installment amount.

Though the premium is borne by the asset management company (AMC) yet there are some limitations to the scheme. Major one being, there is exit loan applicable in the scheme. Life cover will discontinue immediately in case an SIP purchase is dishonored. Commenting on the same, Pankaj Mathpal, Managing Director, Optima Money Managers said,  “Investors should check the scheme performance and select the scheme based on investment objective. Check the terms and conditions pertaining to cancellation of SIP and exit load in case of redemption.”

Also in such schemes the claim for insurance is settled with a separate department and not  with the AMC.

The AMC will play the role of guiding the investor and will not ensure payment of the claim.  Many financial experts have given emphasis that this product should not be taken as primary source of insurance cover. Shweta Jain, Chief Operating Officer, International Money Matters said, “As a free add on, it’s fine may be for a short span. For example if you have a child’s education goal in 15 years, this could be worked, because the goal also needs cover. However, my concern is that you will be in a false sense of security, if things happen where you could lose insurance cover in a few years (due to say a couple of SIPs being dishonored).”

Product bundling offers increased value to the base insurance component. Often a packaged product reduces the hassles connected with buying multiple products, maintaining separate records and making separate payments for each policy.  Though the features of each policy in a combined product remain the same, you may not be able to customise the size of the cover.  When asked about product bundling offering increased value, Jain said, “We prefer to deal with insurance as seriously, if not more than investments and hence insurance should not be an afterthought or sought out for free. Take adequate cover for yourself first and then plan for your goals accordingly.”

First, considering that SIPs are generally small sums of money the insurance cover offered as a multiple of the SIP amount  offered is low and does not fit all. Also, there is a cap on the maximum cover.

There is a minimum SIP period of three years in all cases. Discontinuing the SIP during this period will lead to a termination of the insurance cover. That said, the cover will automatically stand cancelled as the individual attains age of 55 years.

Well, in the end, all we can say, while there are some efforts, the free stuff that we receive is ultimately beneficial to us.

himali@outlookindia.com