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Mutual Fund with Free Insurance – Should you Invest?

Mutual Fund is among one of the best investment options for the long term. You might have noticed that many fund houses are now offering free Insurance along with mutual fund SIP. The basic idea behind this offer is to increase investment in Mutual Funds by attracting more investors.

Recently I received an e-mail from a reader asking – Is it a good idea to purchase a mutual fund with Insurance? So, let’s discuss in detail about Mutual Fund with free insurance option.

Mutual fund with free insurance

What is Mutual Fund with Free Insurance Cover?

The mutual fund comes with a free insurance cover is known as Mutual Fund with Insurance Cover. Mutual fund AMC’s such as HDFC, ICICI, Reliance MF, and Birla MF is offering such features along with MF. The feature is add-on optional and provided with no additional cost.

In this type of funds, fund house purchase group insurance cover. The coverage of this insurance is 10 times to 100 times of your monthly SIP amount. This means if your SIP amount is Rs.1000. The company will offer 1 Lakh free term insurance cover in the first year. The coverage increases with installment SIP year. The maximum coverage CAP is decided by AMCs.

Also Read – Top 20 Best Mutual Funds SIP to invest in India for 2019

Key Features & Conditions

  • Life Insurance Coverage is offered up to 55-60 years of age.
  • You need to register for 3 years SIP for getting free insurance coverage.
  • The entry age under this scheme is 18 years to 50 years.
  • Insurance coverage will be provided only to the first holder.
  • The maximum insurance cover limit is decided by respective AMCs.
  • No medical test is required for this insurance.
  • In the case of unfortunate death, the nominee will get insurance amount along with the fund value. In some cases, the insurance amount will be used for future SIP payments.
  • Insurance coverage will be terminated in case payment default in SIP is observed for consecutive two times.
  • The coverage will be terminated on full or partial redemption of the mutual fund.
  • Insurance coverage will not be provided for the first 90 days from the commencement of SIP.

There are three fund house ICICI, Reliance and Birla MF is offering these type of plans. Popular funds in this category are Birla MF Century SIP, ICICI Pru MF SIP Plus, and Reliance MF SIP Insure.

How Mutual Fund with Free Insurance Work?

To understand the working of a mutual fund with free insurance let’s take one example.

E.g Mr.ABC (investor) decide to purchase a mutual fund with SIP. On opting of MF with 3 years, he will get free group insurance coverage. Suppose SIP amount is Rs.5000 for 3 years. Insurance coverage amount will be 5 Lakh (10 times of SIP amount).

In case of unfortunate death of Mr.ABC, the insurance coverage amount shall be paid to the appointed nominee. In some cases, the amount of insurance is not given back but will be used for paying SIP amount. The coverage will be offered till the time Mr.ABC hold the mutual fund. On survival no benefits is payable.

Advantages of Mutual Fund with Free Insurance

  • Group insurance coverage to the investor along with SIP.
  • Insurance cover amount can be used to pay SIP if investor dies.
  • No premium payment is required. It is completely free add on.

Disadvantages of Mutual Fund with Free Insurance

  • The insurance coverage amount is low.
  • Insurance cover has an initial waiting period of 60-90 days.
  • Exit load associated with the fund is very high.

Should you opt for Mutual Fund with Insurance Cover?

At first instance, you may get excited with a free offer of insurance along with mutual fund. However, you should not opt for Mutual Fund with Free insurance cover. If you have already purchased any plan like this you should stop investing in it. The reasons for this advice is given below.

Is it free?

There is no such thing as a free lunch. So, why would someone offers free insurance? Firstly, to increase the fund holding. Secondly, to earn money alternatively from exit load. The exit load associated with this type of fund is usually high. E.g Birla MF Century SIP is offered with 2% exit load for first year and 1% for second and third year. This means you are locking your money for three years. The performance of these type of mutual fund will be always low compared to other funds.

Insurance and Investment are separate

Insurance and investment are two different things. You should avoid mixing Insurance with Investment. The objective of both these is different. If your aim is investing money for long term gain you should opt for pure mutual fund or ELSS. If your aim is insurance coverage it is advisable to go for a pure term plan.

Insurance Amount

As per thumb rule you need to have insurance coverage of around 8-10 times of your yearly income. So, insurance cover offered along with these types of mutual fund may not be enough. You have to purchase additional term plan.

Insurance Continuation

The insurance offered with mutual fund can be discontinued at the time of redemption or fund switch over. Even insurance coverage will be discontinued if you are unable to pay SIP for two times.

Conclusion –

At last, I would like to say that free insurance add on should not be the only factor for investing in MF. If you are looking for insurance you should opt for a term plan. If your objective is investment go for a best mutual fund with a good track record.

Shitanshu Kapadia
Shitanshu Kapadia
Hi, I am Shitanshu founder of moneyexcel.com. I am engaged in blogging & Digital Marketing for 10 years. The purpose of this blog is to share my experience, knowledge and help people in managing money. Please note that the views expressed on this Blog are clarifications meant for reference and guidance of the readers to explore further on the topics. These should not be construed as investment , tax, financial advice or legal opinion. Please consult a qualified financial planner and do your own due diligence before making any investment decision.