Recently ICICI-Prudential mutual fund have introduced free life cover facility alonwith SIP.Fund houses like Reliance and Birla have already introduced this kind of facility.Today we will have a look at pros and cons of such free insurance cover.
Attempt is being made by mutual fund companies to make SIPs comparable and cost effective to unit linked insurance plans (ULIPs).
Pros:
- Life cover provided is absolutely free.Investor will be covered through Group-Insurance scheme and premium will payable by Asset management Company.
- Due to life cover facility,investor will try to bind for longer term basis and cases of SIP discontinuance will be largely reduced.This will helpful for both investor and mutual funds as well.
- There are number of peoples around who do not believe in buying insurance,,especially term insurance.Such free cover facility is useful for such investors and in turn for their families.
Cons:
- One can’t guarantee for consistent performance of any fund.Though we do not prefer to switch frequently but its also a bad thing if fund started to behave as “worst fund”.
- Investors may invest in such funds,just for life cover,,without considering overall portfolio.
- Insurance cover received will be inadequate.So this facility is not substitute for term insurance.
- Insurance cover facility available for limited age group only.i.e from age group of 18-55 yrs.Instead one should have a cover of at least age of 60…
BottomLine:
Basic purpose of systematic investment plan (SIP) is long term wealth generation.Do not invest merely as any fund is offering you a free cover.But if performance of such fund house is good then consider to opt for add on free cover facility.Even if few of the fund houses apply exit loads for early withdrawal,I still think that it is a good bet to opt for the facility.
Suppose if any investor invested Rs.5000/- and after completion of 5 yrs , he decides to opt out.If this fund have provided returns of 12%,then today fund value will be Rs.4,05,518.Reliance for SIP-Insure facility charges 2% exit load so invesor need to pay apprx: Rs.8200 as an exit load.I do not think this load is significant if investor have enjoyed a cover ranging between 8 lakh to 3 lakh for 5 yrs.
So bottomline is Opt for free cover facility if basic fund performance is good and if suits to your portfolio.
