Mutual Funds with Free Insurance: Should you invest in them just because life cover is free?

The Finance Act 2017 has introduced a long-term capital gains tax on equities. This move has made Unit Linked Insurance Plans (ULIPs) an attractive alternative amongst investors. Insurance agents pushed this product further in the market, leveraging the idea that investors will not be taxed if they invested in ULIPs.

In order to tackle this, mutual fund companies have started sending emails to investors informing them of the free life insurance cover on mutual funds if they opt for a Systematic Investment Plan (SIP). For those who are new in this game of investment and saving, the free life insurance cover on SIP is not a new offering. However, the marketers are making it a part of the sales pitch now.

The insurance cover offered along with the mutual fund schemes comes with some conditions. There is a cap on the maximum cover and the investor has to complete a minimum tenure to get the benefit of the insurance coverage. It has been structured in a way that the longer an investor continues the SIP, the more benefits he/she retrieves.

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Fund experts say that in spite of the product being an add-on, investors should not opt for a fund only because it is offering a free life cover. A scheme that has a consistent track record in performing well should be invested in, irrespective of whether it provides a life cover or not. The industry experts say that one should not stick to a scheme for fear of losing the life cover. Investors should have a life insurance policy which covers them adequately based on their income and goals.

When the investor remains consistent with his SIP, most fund houses increase the cover. For example, the cover in ICICI Prudential Mutual Fund is 10 times the SIP amount in the first year, but the fund increases it to 50 times in the second year. This kind of structure helps the investors continue with the SIP and remain invested for a long horizon which helps in wealth creation.

The life insurance cover is free and the fund house bears the cost. Also, there is no medical cost for it being a group cover. If the investment is done jointly, only the first unit holder is eligible for the insurance benefit. But, the cover ceases when the investor opts for partial withdrawal or stops the SIP before the end of three years.   

The scheme also has a higher exit load in the first three years.