The markets regulator recently said it plans to release a consultation paper on a new product that combines mutual fund schemes with term insurance. Given the underwriting concerns & implementation challenges, fund houses may not be too enthused, explains Ananya Grover
Are there any bundled products in the market?
There are already similar bundled products — in Unit Linked Insurance Plans (ULIPs) offered by insurance companies, stock market investment is provided as an additional benefit with the insurance policy. The objective was to offer higher returns to policyholders through a market-linked product, since on a traditional product returns were much lower and that too, in case of demise of the policyholder or at the end of the policy term. These plans come with a lot of charges and fees: for premium allocation, policy administration, fund management, mortality and surrender charges. Industry watchers say investors continue with these products due to the hefty fines charged on surrender of such plans.
However, the new proposal aims to bundle mutual fund schemes offered by asset management companies (AMC) with a life insurance cover. The objective here is to ensure greater financial inclusion, and reach the last mile, where the value of systematic investment plans (SIP) is very low and mostly coming from interiors of the country, as the Securities and Exchange Board of India (Sebi) puts it. The idea is to allow insurance to piggyback on mutual fund products as the latter has been growing at a fast pace.
Till 2022, when Sebi barred mutual fund houses from offering bundled products, many AMCs were offering free term life insurance as an additional feature to attract individuals to invest in their schemes via SIPs. In June 2024, the insurance regulator had released a circular barring the promotion of ULIPs as ‘investment products’.
Underwriting poses a challenge
However, the proposal raises more questions than answers. Insurance companies use underwriters to evaluate the risk of onboarding an applicant based on various factors to ensure that the companies maintain a balanced risk portfolio and also determine the value of premium to be charged. While this product proposes to offer premium at lower costs, mutual fund houses will have to invest in creating underwriting infrastructure. Currently, insurance agents charge significantly higher fees — as high as 20-30% in the first year — compared to the mutual fund distributors who charge 0.1-0.2%. Thus there is a strong chance that adding insurance would push up the expense ratio of the mutual fund product.
Impact on the bottom line of insurers & AMCs
Most AMCs, by virtue of being bank subsidiaries, also have insurance companies as sister concerns. In the case of a company which does not, this move can lead to promotion of synergies and will lead to potential
tie-ups between them. Some , however, say that the insurance companies will lose out on some business and that this will be an “operational headache”.
Currently, fund managers are money managers focusing on investment; insurance will require underwriting for a longer period, say 15-20 years, which means that fund management strategy will need to change because they will have to account for death payouts. Thus, servicing insurance customers would mean an additional cost for mutual fund houses, and may even make it unviable to offer the combo product at low premiums.
Investment horizons vary for insurance & MF
The duration that an investor has in mind while buying an insurance policy and when investing in mutual funds is different. While the former is to provide safety against a specified incident and usually for the long-term, mutual fund investments are for generating returns and are considered to be more liquid. However, in the case of a bundled product, the investor may be stuck with it for the full term of the insurance policy and unable to exit if he is unhappy with the performance of the fund manager or the adverse market environment. According to a financial coach, the average duration of an SIP is three years as most investors do not stay invested beyond this period whereas insurance has to be bought for 15-20 years, which may not be worthwhile for an AMC.
Will it be beneficial for investors?
Most personal finance experts are against any combination product as they believe that mutual funds and insurance have separate functions — the former’s objective is to generate returns while the latter is for risk protection. They believe that the returns would be higher and premium lower if investments and insurance are kept separate.
Concerns related to transparency have also been raised as mutual fund houses may charge hidden costs such as higher exit loads. Moreover, as the insurance cover would be limited to the amount invested in the mutual fund, it would make them settle for a lower insurance cover than what they need.
Former Sebi chairperson Buch, who had proposed the idea, had said that the aim for the launch of this product was to enhance the reach of mutual funds and make insurance accessible to rural areas. Life insurance penetration in India is just 2.8% while retail investors account for 91% of the active mutual fund folios. While it is believed it may help small investors, it may only be to a limited extent.