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Mutual Funds With Free Insurance: Is It Worth? Research Team | Posted On Tuesday, July 24,2018, 06:22 PM

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Mutual Funds With Free Insurance: Is It Worth?




It all started when the Finance Act 2017 introduced long-term capital gains tax on equities. This was a golden opportunity for insurance agents to promote Unit Linked Insurance Plans (ULIPs). Insurance agents promoted ULIPs, leveraging the idea that investments in ULIPs would not be taxed. This idea induced many investors to shift to Unit Linked Insurance Plans (ULIPs).

To combat this development, Asset Management Companies of mutual funds have started offering free life cover to investors, if they opt for the Systematic Investment Plan (SIP) route, when investing in mutual funds. Now, isn’t this tempting, free life cover? But, should you really opt for a mutual fund just for free life cover?

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Mutual Funds With Free Insurance: Is It Worth?


If you are new to investing, you might be under the impression that the free life insurance cover on SIPs is something new. But, it is not a new offering; marketers are just using another sales pitch.

Just like many other marketing gimmicks, Mutual Funds with free life cover are not free of terms and conditions. So, what are the terms and conditions of Mutual Funds with free life cover?

  • There is a cap on the maximum cover offered to investors.
  • Investors can get the benefit of insurance coverage only after completion of a minimum tenure in the investment.
  • The longer an investor continues the SIP, greater are the benefits.


Should you opt for Mutual Funds with free insurance?


Free insurance is a great add-on to Mutual Funds. Investors should not invest in a mutual fund, just for free life cover. You’ve already read about the terms and conditions of such mutual fund products.

Experts on mutual funds say that investors should invest in schemes which are consistent performers. In other words, their decision should not be influenced by the fact, that a particular mutual fund is offering free life cover.

If you have already invested in such Mutual Funds, it is foolish to stay invested, just because you fear losing the life cover. If a particular mutual fund scheme is not doing too well, you should opt out. Instead, invest in such mutual fund schemes which are performing well, and avail a separate, standalone life insurance policy which will cover you adequately. Buy such a life insurance policy which is in line with your income and goals.


Benefits of Mutual Funds with free insurance:


Mutual Funds with free insurance have some benefits:

  1. You get free life insurance cover.
  2. The premium costs are borne by the mutual fund house and not the investors.
  3. If the investor dies, insurer pays the SIP.
  4. If investors remain consistent with SIPs, most fund houses increase the cover.
  5. Mutual Funds with free insurance require an investor to remain invested in SIPs for the long-term. This aids the investor in wealth creation.
  6. The free insurance is in the nature of group insurance. Hence, there is no medical cost to be borne by the investor.


SEE ALSO: Documents Needed When Filing ITR


Demerits of Mutual Funds with free insurance:


  1. Only select schemes offer free insurance.
  2. Insurance cover is subject to an initial waiting period of 60-90 days. The waiting period is not applicable in case of accidental death.
  3. In case of a joint investment in Mutual Funds, only the first unit holder is eligible to avail the insurance benefit.
  4. If the investor wants to stop the SIPs before the end of three years, the cover will lapse.
  5. These schemes have high exit load up to 2% in the first three years.
  6. These Mutual Funds pay out 50-100 times the SIP amount only if the investor invests in the scheme for at least two to three years.
  7. The insurance cover will cease to exist if the investor survives the term of SIP or if they redeem the investment.
  8. The insurance doesn’t cover death due to pre-existing illness.


Final verdict:


It is not wrong to invest in SIPs offering free insurance as long as you make the decision purely based on the merits of the mutual fund. Investing in a SIP with the main objective of availing a free insurance cover is not desirable.

As SIPs offer group insurance, there are demerits:

  • Insurance cover lapses if you stop the SIPs.
  • It has a limited coverage as fund houses take insurance cover for all the investors put together.

See Also: How To Choose Your Mutual Fund Portfolio?

So, invest in Mutual Funds which have a track record of performing consistently well and avail a term insurance plan or a whole life insurance plan, based on your income and financial goals.


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