"SIP insurance is quite meaningful if you are investing for a long-term financial goal such as a child’s education or marriage"
"This product should not be seen as a replacement for a regular life insurance. Here the life cover decreases with every SIP"
Your child is three years old and you’re convinced that she will take up medicine when she’s old enough. So you decide to start saving up for what you know will be crippling bills. You begin a systematic investment plan (SIP) in an equity fund, putting away Rs 4,000 every month, calculating that it will yield Rs 27 lakh or so in 15 years. So far, so good. Unfortunately, life has a nasty way of interfering with dreams. So, if you were to die in an accident five years from now, the value of your fund at the time would be around Rs 3.5 lakh. But as you would not be around to continue investing, it would be the end of your SIP story and the dream of medical college for your child.
The end doesn’t have to be so drastic. Now, three mutual fund houses—Kotak Mutual Fund, Birla Sun Life and Reliance Mutual Fund—have tied up with insurers to ensure that SIP payments are covered. What this means is that even if you die before the SIP ends, the remaining instalments will be invested in a plan of your choice. Says Zankhana Shah, a Mumbaibased financial planner: “Such products are quite meaningful if you are investing for long-term financial goals like a child’s education or wedding.”
How SIP insurance works
|Kotak Star Kid||Reliance Sip Insure||Birla Sun Life Century|
|Minimum SIP/Maximum cover||1,000/1 crore||2,000/ 10 lakh||1,000/ 20 lakh|
|Eligibility age||23 yrs (min), 44 yrs (max)||20 yrs (min), 46 yrs (max)||18 yrs (min), 46 yrs (max)|
|Rs 5,000||Rs 5,000||Rs 5,000|
|Term (total instalments)|
|5 years (60 months’ SIP)||5 years (60 months’ SIP)||5 years (60 months’ SIP)|
|1st year cover|
|5,000 x 10 = 50,000||5,000 x (60-6)= 2.7 lakh*||5,000 x 10 = 50,000|
|2nd year cover|
|5,000 x (60-12) = 2.4 lakh||5,000 x (60-12) = 2.4 lakh||5,000 x 50 = 2.5 lakh|
|3rd year cover|
|5,000 x (60-24) = 1.8 lakh||5,000 x (60-24) = 1.8 lakh||5,000 x 100 = 5 lakh|
|4th year cover|
|5,000 x (60-36) = 1.2 lakh||5,000 x (60-36) = 1.2 lakh||5,000 x 100 = 5 lakh|
|* Assumed that death occurs after six months; All figures in Rs unless specified|
So, how does this work? The insurance available with Reliance and Kotak schemes is variable and provides a cover equivalent to the unpaid SIP amount. Says Lakshmi Iyer, head of products, Kotak Mutual Fund: “The insurance cover starts from the day the units are allotted, where the insurance benefit for the first 12 months is equal to 10 times the SIP instalment. After the first year, the insurance benefit is equal to the future SIP instalments.”
Birla Sun Life, however, offers a semi-fixed format. If the investor dies in the first year of the plan, his nominee gets 10 times the SIP instalment amount, irrespective of the unpaid SIPs. In the second year, it increases to 50 times and scales up to 100 times the SIP instalment in the third year and thereafter (see table). Also, under this plan, the investor is entitled to the insurance cover even on completion of the SIP tenure, provided he stays invested in the fund till completion. This feature is not available with others.
For all this, you pay a little more than you would for an uninsured product. Kotak Mutual Fund charges a higher entry load of 3.25%. Of course, there is no entry load if one invests directly, but you still pay an exit load if you redeem the investment before maturity. Both Reliance and Birla Sun Life charge a 2% exit load if an investor opts out of the insured fund before a minimum investment tenure of three years.
Given the benefits of covering your SIPs, it’s really a small price to pay. “Such plans make for a good investment,” says Dhirendra Kumar, CEO of Value Research. However, SIP insurance comes with stiff conditions. For one, it is available only in specified schemes. Also, the insurance cover lapses in case of default in SIP payment or redemption before maturity. There is no provision for revival thereafter. The Kotak scheme is only for those who have a child.
Getting your mutual fund investment insured makes sense, especially when it comes at such a low cost. But don’t replace your existing life insurance cover with this product. They are not the same. Says Veer Sardesai, a Pune-based certified financial planner: “The insurance cover under such products usually keeps decreasing with each payment of SIP instalment. So the investor still needs a separate life insurance cover.”
Also, don’t make the mistake of thinking that these are like unitlinked insurance plans (Ulips). These are basically mutual funds with an insurance component, whereas Ulips are pretty much the opposite. “In Ulips, one can switch between funds easily. In case of SIP plus insurance, one has to pay the entry and exit loads each time,” says Prashant Kapoor, a Delhibased certified financial planner.
Finally, remember that the purpose of the investment is to accumulate enough money to meet your long-term financial goals. Insurance is merely value addition. So, choose your SIP based on the performance and track record of the fund house. As Shah says, “Insurance should not be the sole criterion to choose such products. Opt for them only if they are worthwhile and fit into your investment plan.”