Should you insure your monthly investments?

Choosing the right mutual funds for investments is a challenging task for most investors. To confound matters, there are now fund houses that offer insurance along with their traditional schemes.

Most mutual funds today come with the option of systematic investing – or making your investments in the fund through equal monthly instalments. These plans are popularly known as systematic investment plans or SIPs. Now, what happens if due to an unfortunate event, you are forced to your SIPs? Reliance Mutual with its ‘SIP Insure' and Birla Sun Life with its ‘Century SIP' are two of the offerings that promise to protect your systematic investments, so that your financial goals are reached even if something were to happen to you. DSPML had launched a similar scheme in 2005, but it no longer offers the scheme.

Before taking the plunge into these seemingly tempting offers, it would be better to know their features and, more importantly, the shortcomings that may not make these ideal options for securing your investments.

Dual offering

Essentially, what is being offered by both the fund houses is a traditional term insurance cover packaged with your regular systematic investment plans (SIPs) in different schemes.

However, unlike the traditional term cover where you have to pay an annual premium, both the fund houses' offerings do not require you to pay any amount towards term cover. The asset management company bears the cost of premium.Here is how the two the two schemes work:

Reliance's SIP Insure covers the balance portion of the committed monthly investments that remain unpaid due to an unfortunate occurrence. The tenure of the insurance is restricted to the period of committed instalments. The minimum investments in SIP should be Rs 1,000 a month and these should be continued at least for a period of three years.

For example, you have committed an SIP of Rs 10,000 a month for a period of five years in one of the 17 schemes where Reliance offers this packaged insurance component.

If an unfortunate event were to happen at the end of the third year, your nominee's account would receive Rs 240,000 (Rs 10,000*24), which would be invested in the same mutual fund scheme that you had parked your money in.

The maximum insured amount is restricted to Rs 10 lakh.The insurance cover would cease if the tenure of the SIP committed is completed, or on your attaining 55 years of age, whichever is earlier. Also, if there is any early redemption of units, the insurance cover would no longer be there.

Much of these rules also apply to the Birla Sun Life Century SIP offerings, though there are some differences. This fund house offers insurance in 18 of its schemes.

In this case, insured amount would be 10 times the monthly instalment in the first year, 50 times in the second year and 100 times from the third year onwards. The maximum insurance overage is Rs 20 lakh.Life cover continues even after the SIP is stopped after the third year and till the age of 55 years, whichever is earlier. If the SIP stops before three years, there is no life cover.

The better deal comes from the fact that in the event of your unfortunate death after making the committed payments, your nominee would receive the fund value plus the insurance coverage amount, subject to the earlier mentioned conditions.

The entry age in both cases is 18-45 years. In case SIPs are terminated or if there is a default, the cover would cease.

Confusing investment and insurance

Despite the stated benefits of an insurance cover, investors may be better advised to give such schemes the miss for multiple reasons.

First, the insurance amount may not be enough to cover your entire financial goals. You may continue to do SIPs in consistent funds and buy a term insurance cover elsewhere. At least, you shouldn't rely in SIP insurance alone to cover your financial risk.Insurance companies such as Aviva, Aegon Religare, ICICI Prudential, Kotak and Met Life offer term covers online for Rs 50 lakh at premiums ranging from Rs 4,500 to Rs 6,800 for a 30-year old. That makes it fairly cheap to take a term cover, especially for a relatively younger individual.

Second, traditional term insurance will also give you tax incentives as deduction is allowed for the premium paid, which the SIP cum Insurance schemes don't. Third, with a lock in period of three years, exiting a fund that is heavily underperforming would be difficult. Sticking on merely for the sake of insurance would make little sense. There is an exit load of up to two per cent for early exits.

Again, if there is heavy outperformance and your financial targets are met and you would like to exit the fund with good profits, you would again be constrained.

Imagine a year such as 2009-10, when the markets went soaring or 2008-09 when everything came crashing around and you would be able to put the above constraints in perspective. Fourth, there is no special exception to SIP cum insurance compared to traditional plans as pre-existing illness and death due to suicides would mean that you would be entitled to no insurance amount.

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