“The cover is structured in such a way that the longer an investor continues the SIP, the more benefits he gets,” says Suresh Sadagopan, founder, Ladder7 Financial Advisories.
Investment advisers say the product is helpful but investors should not opt for a fund only because it is offering free life cover. Invest in a scheme that has a consistent track record, irrespective of whether it provides a life cover or not. Consider life cover an additional incentive. “Don’t let free insurance dictate your decisions. Investors should not restrict themselves to a fund or fund house for insurance," says Sadagopan.
Also, if the fund’s performance of the fund takes a beating, don’t stick to the scheme only for fear of losing the life cover.
The insurance MFs offer should not be your primary policy but an add-on. “An investor should have a primary life insurance policy that covers him adequately, based on his income and goals,” says Vidya Bala, head of MF research at FundsIndia.
Most fund houses increase the cover as an investor remains consistent with his SIP. Take Reliance MF. The cover is 10 times the monthly SIP in the first year. In the second year, it’s 50 times the SIP and in the third, it’s 120 times. “The structure helps investors continue with the SIP and remain invested for a longer horizon that helps in wealth creation,” says Sundeep Sikka, executive director and CEO, Reliance MF.
The life insurance cover is free, and the fund house bears that cost. Being a group cover, there’s no medical test. If the investment is done jointly, only the first unit holder is eligible for the insurance. Each fund house caps the maximum cover. Reliance MF and ICICI Prudential MF have a cap of Rs 5 million, while Aditya Birla Sun Life MF has Rs 2.5 million. But, the cover ceases even if the investor opts for partial withdrawal or stops the SIP before the end of three years. These schemes also have a higher exit load in the first three years.