The idea of bundling insurance cover with Systematic Investment Plans (SIPs) in mutual funds, being discussed in industry fora now, is a bad one. The mutual fund industry seems to be keen on this structure to sweeten the appeal of its products and ensure continuity of SIPs. The insurance industry seems to be pushing it to keep the gravy train going, as its products lose popularity owing to the phase-out of tax breaks under the new tax regime.
Insurance products in India have always been sold for their tax breaks rather than their protection benefits. In this proposed product, insurance premia is embedded into SIP contributions; therefore, in the event of an investor’s ill health or death, his SIP can be continued with the insurance proceeds. The flaw here is that the investor or her nominee may have more pressing uses for the insurance proceeds in the unfortunate event of the ill-health or death of a breadwinner. On the occurrence of life-altering events such as illness, investors may also see a reduction in their risk-taking ability which may call for stopping SIPs and parking the money in safer avenues. Embedding insurance into SIPs may therefore not serve the industry’s objective of ensuring SIP continuance. Handing over the death claim to the Asset Management Company (AMC) instead of investor nominees, a structure that was attempted in the past, would be wholly unfair to the dependents.
Bundling insurance covers with SIPs creates practical difficulties for investors too. For one, the decision on how much life or health insurance cover to buy is a personal one and should be taken by an individual based on his or her earning ability and dependents, among other factors. A bundled product would offer a standard cover for all, which could be unnecessary for some investors and inadequate for others. Two, insurance and mutual funds are inherently incompatible because of the widely different time horizons for which investors buy them. Indian investors typically run SIPs for two or three years at a time. Life and health covers are intended to cover the buyer lifelong. If SIP stoppages end up interrupting insurance premium payments, the insurance cover will lapse with the investor forfeiting the premium paid by him and the insurer pocketing substantial penalties.
Three, settling insurance claims entails significant paperwork and multiple interactions between the policyholder and the insurance company. It is unclear whom investors in SIPs should turn to for claims processing, in the event of a health emergency or death of the investor. Given that AMCs and insurers have separate distribution channels, it is moot if AMCs or their distributors who sell the bundled SIP product to the investor, will co-ordinate with the insurer for claims settlement. Overall, insurance and mutual funds products are as different as chalk and cheese, and there can be no rationale for combining them.