Systematic investment plans (SIPs) in India bundled with insurance have become quite popular in India in recent years. Many mutual fund houses and insurance companies offer plans that combine SIPs with life or health insurance. The idea seems attractive – get life cover along with investing in mutual funds at a low cost. However, there are several issues with these bundled products. Read on to learn more.
High costs
The insurance premium charged in bundled SIPs is very high compared to a standalone term insurance plan. The difference could be as high as 30-40%.
Sub-optimal asset allocation
The investor has no control over how the SIP contribution is allocated between insurance and mutual funds. This may lead to investing too much in insurance, leaving less for mutual fund SIPs.
Lock-in, lack of flexibility
These products come with long lock-in periods of 5 years or more. The investor cannot stop SIPs, change the allocation or switch between funds. There is reduced flexibility.
Mis-selling risks
Agents mostly highlight the low cost of insurance and play down the high costs. Many investors are mis-sold these products as ‘low-cost insurance’ even if they don’t need insurance.
Why SEBI bar is a positive move
SEBI has now barred mutual funds from launching bundled products that combine investment and insurance. This is a positive move and will benefit investors in the following ways.
Better transparency, lower costs
With unbundled products, the costs of investment and insurance will be clearer. Investors can now better compare costs and make optimal asset allocation.
Flexibility to change products
Investors will have the flexibility to change their insurance provider or mutual fund scheme anytime instead of being locked in. They can also optimise insurance cover as per changing needs.
Reduced mis-selling
With separate investment and insurance products, the risks of mis-selling are significantly reduced. Agents will no longer be able to mislead buyers by showing low insurance costs of bundled plans.
More control for investors
Investors will be able to decide independently how much to invest in mutual funds via SIPs and what insurance cover to buy. They will get more control over asset allocation.
Way forward for investors
The SEBI move is positive for investors. However, buyers should remain cautious of the following –
– Agents may still try to mis-sell products showing ‘discount’ for buying two separate items
– Don’t get pressured into buying insurance beyond your needs
– Carefully evaluate costs before choosing investment products
Investors should buy term insurance plans from online insurance tech companies and make mutual fund investments directly. Optimal asset allocation, lower costs and greater flexibility will help meet financial goals better.
