Why insurance agents hate SIPs with cover

Summakant Shastri is an insurance agent. Be it the wedding of his friend's daughter or a relative's funeral, he never misses a chance to sell a unit-linked insurance plan (Ulip) or two.

Shastri has sold them for years, playing on the twin emotions of fear and greed commonly found in human beings. For those who feared the future, he sold Ulips as insurance. And, for those who wanted their money to multiply, he sold them as investments.

Mutual funds often lost out because Ulips had this liquid-like property, where they took the shape of whatever vessel they were poured into. MFs were rigid — they were purely investment products and did not provide for worldly happenings such as death.

Then, fund houses suddenly woke up. Taking a leaf out of the insurance companies' book, they started offering plans that offered insurance, too. Birla Sun Life Mutual Fund's Century SIP is the latest in that line. It is a systematic investment plan (SIP) that is optional. The plan should not be confused with a mutual fund scheme. While a scheme has a specific investment objective, an SIP is just a mode of investment that can be applied to any of the various schemes offered by a fund house. At present, Century SIP will be available on all 18 open-ended equity schemes offered by the fund house.

To participate in this plan, an investor needs to invest a minimum of Rs 1,000 every month. There is no upper limit for this investment. Under this plan, an MF investor will get insurance cover on his life 45 days after paying the first instalment. While some fund houses charge a fee for this cover, Birla MF is offering it free of charge. In the first 45 days, only accidental deaths will be compensated.

The cover will be available to the investor till he or she turns 55. So the tenure of the cover under Century SIP will be 55 years minus the current age of the investor.

For an investor aged 40 years and five months, the tenure of the Century SIP insurance cover will be 14 years and seven months. Let's say an investor starts an SIP of Rs 5,000 per month. If he dies within the first year of paying his instalments, his nominee is eligible for a cover of 10 times the SIP amount — Rs 50,000. If he dies during the second year of SIP payments, the nominee gets 50 times the SIP amount as the life cover — Rs 2.5 lakh. And if he dies any time in the third year or after that, the nominee gets 100 times the monthly SIP amount-Rs 5 lakh. Here again, the cover is subject to a maximum of Rs 20 lakh.

The cover cannot be claimed if the SIP is discontinued before the completion of three years or if the investor defaults on payments of instalments on two consecutive occasions.

Investors who can afford to set aside at least Rs 1,000 every month for equity investments can take this offer, depending, of course, on the underlying scheme's compatibility with your investment goals. Thus, if none of the Birla schemes fits your needs, you should not take one just because it offers free insurance. But if one does, the Century SIP is a good reason to make that switch.

Shastri still believes only insurance companies can offer good insurance. But, sooner or later, as the trend catches on, be sure even he will come around to seeing sense.

Source: N Sundaresha Subramanian/ DNA MONEY