Curtains for 'SIP plus insurance'

Recent media reports suggest that the ‘SIP (systematic investment plan) plus insurance’ phenomenon will shortly come to an end. Leading life insurance companies under the aegis of an industry association have taken a decision to that effect. An eminent personality from the insurance industry was quoted stating that insurers would not offer insurance cover on savings and investment products offered by competing entities. The statement should be read with reference to Asset Management Companies (AMCs) managing mutual funds.

Ever since unit linked insurance plans – ULIPs emerged as ‘bread and butter’ offerings of life insurance companies, fund houses and life insurers started vying for the same space. By offering insurance plus investments under a single product, insurance companies (in some ways) introduced a product that competed with mutual funds. Furthermore, not too long ago, media reports also suggested that AMCs approached the market regulator i.e. the Securities and Exchange Board of India seeking permission to sell insurance products to their investors. Perhaps the decision made by life insurance companies was the culmination of all of the above.

Whatever might have prompted the move, we believe this is a welcome step from the investor’s perspective. At Personalfn, we have never been enthused by the ‘SIP plus insurance’ offerings. There are several reasons for the same.

First, by opting for a mutual fund, simply because it offers an insurance cover as an add-on benefit, investors run the risk of getting invested in a fund that may not be right for them. Typically, a fund should find place in an investor’s portfolio for its investment proposition and its ability to help the investor achieve his long-term financial goals. Investing in a fund simply because of the add-on insurance benefit, would certainly not qualify as a good reason for getting invested.

Second, in the ‘SIP plus insurance’ offerings, the insurance cover is linked to the SIP amount and its tenure. This is certainly no way to buy insurance. Ideally, the insurance cover should be sufficient to indemnify one’s nominees against any financial loss arising on account of the individual meeting with an eventuality. Hence, the concept of Human Life Value must be put into play. By linking the insurance cover to the SIP amount and tenure, the offerings often deprive investors of the opportunity to be adequately insured.

Again, the definition of insurance in the ‘SIP plus insurance’ offerings needs to be looked into. In some cases, the insurance implies the unpaid SIPs i.e. if the eventuality occurs, the SIP installments that haven’t been invested as yet, will be invested on behalf of the nominee and on maturity, the requisite sum (based on market price) will be remitted to him. This would barely qualify as an insurance cover.

In cases where there is an insurance cover separate from the unpaid SIP, it is linked to the SIP amount. That the insurance cover is often capped (at Rs 1 m or Rs 2 m) doesn’t help. The situation is further complicated by the fact that the insurance cover is only available upto a certain age or the tenure of the SIP; based on the facts of each case, the investor might require an insurance cover over a longer tenure.

Simply put, in several cases, the ‘SIP plus insurance’ schemes were guilty of misleading investors to believe that they were adequately insured.

Finally, investment advisors had a gala time peddling the aforementioned schemes under the garb of financial planning. The mantra was, by combining insurance and investment under a single avenue, investors’ financial planning needs were being taken care of. Nothing could be farther from the truth. Any financial planner worth his salt will vouch for the fact that there is much more to financial planning than just investing in an investment plus insurance avenue.

In conclusion, we believe that investors would do well to address their insurance and investment needs separately. This will ensure that neither takes precedence over the other and in the process, investors give adequate weightage to both objectives. As mentioned earlier, irrespective of the reasons for the curtains being drawn on the ‘SIP plus insurance’ phenomenon, it is a positive step for investors.