Silver Bullet Or A Lame Duck?

Long has the life insurance industry grappled with the problem of combining two critical financial planning needs of investors – generating inflation-beating wealth from their regular savings, and safeguarding their financial dependants from the catastrophic ramifications of their unexpected loss of life. These efforts have either culminated into ineffectual, opaque ‘traditional’ insurance plans that provide abysmal returns; or jargon laden ULIPs with a confusing smorgasbord of options to choose from, and deceptively high inbuilt costs to boot.

The latest group that seems to be making a concerted effort to attack this problem are asset management companies (AMCs). Three AMCs are now offering investors an innovative – and costless – means of building a life cover into their goal-based savings. These are ICICI Prudential, Aditya Birla Sun Life, and Reliance Mutual Fund, respectively. Others may soon follow suit.

Notably, the growth in the popularity of systematic investment plans (SIPs) has accelerated at a blistering pace recently. AMFI estimates that investors collectively ploughed in a mammoth sum of Rs 67,190 crore in FY2018 via the SIP route, up 53 per cent year-on-year. Cashing in on these tailwinds, some AMCs who have life insurers as sister concerns are bundling a life cover with regular SIP investments as a means of “goal protection”.

“The idea behind offering the SIP Insure facility is to ensure that critical long-term objectives that investors make SIPs for should still be fulfilled - even in the unfortunate event of the death of the investor,” says Sundeep Sikka, ED and CEO, Reliance Mutual Fund.

Too Good To Be Free?
The SIP-plus-Insurance proposition is being touted as a “free” add on by AMC’s. Since most investors tend to view investment related freebies with a healthy degree of suspicion, this point is worth exploring. Is the facility really something gratis, and if yes – how so?

A. Balasubramanian, CEO, Aditya Birla Sun Life AMC explains that in such a proposition, the AMC has a tie-up with an insurance company which underwrites the risk.

“The AMC pays the insurance premium on investor’s behalf, thus offering him or her a free insurance cover. For instance, we have tied up with ABSLI (Aditya Birla Sun Life Insurance Company) for our Century SIP product,” says Balasubramanian.

This arrangement doesn’t impinge upon the expense ratio of the associated funds, since the premium expenses are not charged to the schemes at all, he clarifies.

Unlike ULIPs that cancel your investment units each year to pay for mortality costs, SIP-plus-insurance products do not. Instead, the AMC clubs you into a group plan and bears the cost of your premium expenses. So yes, in effect, the life cover is free!

You might be wondering why AMCs are willing to strap this additional expense onto their books. It is simple – because they want to keep you invested longer. And the formula seems to be working.

“We have noticed that the stickiness in SIP insure is more when compared to normal SIPs. Investors seem to want to continue with these systematic investments for as long as possible, in order to avail the free life insurance benefit,” says Sikka.

If investors continue running their SIPs for longer, their ‘customer level profitability’ to the AMC goes up. Longer term SIP investors also stand to gain more from their investments, leading to a classic win-win scenario.

How It Works
Investors are eligible to opt for the SIP-plus-Insurance facility If they are between 18 and 51 years of age. While the feature hasn’t been extended to all schemes, the product coverage is satisfactorily broad. The application process is simple and involves just one extra form that needs to be filled out at the time of starting the SIP. Notably, no incremental exit loads are applicable as a result of opting for this feature.

The quantum of life cover provided is linked to the investor’s monthly SIP instalment and is also a function of the SIP year. The life cover starts off at 10X the SIP instalment and gets an annual bump up (See table: ‘Bundling life cover with regular SIP investments’) for the next two years. Presently, an investor can achieve a life cover of no more than Rs 50 lakh with a single AMC, across all schemes.

Investment discipline is of critical importance when it comes to a SIP-plus-insurance. If an investor terminates the SIP or redeems any money from the folio before the minimum stipulated three-year period, the life cover evaporates – with no scope for reinstatement!

Once the three-year window is completed, things become more flexible. The investor has the option of continuing the SIP and enjoying a life cover up to the specified ceiling limit, but has access to his capital as well. In the event of a redemption or SIP stoppage post the third year, the life cover is reduced to a sum that’s equal to the fund value at that time, or the maximum permitted cap, whichever is lower.

As an example, consider an investor running a monthly SIP of Rs 30,000 into Reliance Growth Fund with the SIP Insure facility. His life cover would be Rs 3 lakh in the first year, Rs 15 lakh in the second year, and Rs 36 lakh in the third year.  Let us assume that this investor discontinues his SIP at the end of the third year, when the fund value was Rs 13 lakh. In such a scenario, the investor’s life cover would be frozen at Rs 13 lakh.

There are two critical takeaways for investors with respect to these plans. One, they cannot be construed as a valid substitute for a robust term insurance plan offered by a pureplay life insurer. At best, they can be used to augment your already existing life cover. Two, they cannot be the key driver of your fund-selection decision. Remember, the primary objective of mutual fund SIP investments will always be to generate long-term wealth; and it’s no secret that even a 2% differential over the lifetime of a long-range SIP can have a colossal impact on your fund value. That said, if you were planning to invest into an eligible scheme anyhow, go ahead and enrol for the feature. It’s a no-cost value add.