What is the cost of free or additional insurance? Find out

Indian customers love freebies. Shampoo sales soar if a soap bar comes free with it. A microwave oven is a hit if you bundle it with free cookware. LED TVs are bestsellers if you throw in a music system gratis. These marketing gimmicks keep the cash registers ringing in retail outlets. The financial marketplace is no different as companies lure customers with offers of cheap— even free—insurance.

Mutual fund investors are offered free life insurance, car buyers are given free vehicle insurance, and home loan customers are told to take a loan cover at a nominal cost. So, along with the base product, you get another absolutely free. Or so you think.

The first rule of intelligent spending is that there are no free lunches. The seller factors in the price of the freebie in the total price payable by the customer. Besides, in order to avail of this free insurance, the customer may be signing up for a product that does not really suit his needs. In a discussion paper released last year, the Insurance Regulatory and Development Authority ( Irda) had noted that bundling could raise ‘certain concerns for the consumer’.

‘Packaging two or more products could become unfair to the consumer as it impedes choice and makes price comparison difficult,’ the regulator had observed. The bigger danger is thatfree insurance gives the consumer a false sense of security. The insurance cover may not be adequate. For instance, the free insurance that comes with SIPs in mutual funds is capped at Rs 20 lakh. Experts say that one should have a cover of at least 4-5 times his annual income.

Besides, there are too many strings attached, making this type of insurance a poor substitute for a regular term cover bought independently. “The SIP insurance is a good option as long as the cover is not seen as a substitute for a proper cover,” says financial planner Jayant Pai. There are other reasons why consumers must not depend solely on these covers. Given that they are freebies, they can be withdrawn at short notice. Two weeks ago, the SBI announced that it was withdrawing the free accident insurance given to its home and car loan customers from July this year. The bank did not assign any reason for withdrawing the cover.

ET Wealth examined a few of these two-in-one products on offer and discovered that while some were beneficial for customers, in many others, the buyer did not really derive any value from the bundling of insurance with other products and services.

Free car insurance

The free cover is only a substitute for the cash discount offered by a car dealer.

The car market is going through a bad phase. The sales fell 6.7% in 2012-13, the first time in 10 years. The January-March quarter was particularly bad, with a 22.5% drop in sales, and analysts expect more pain ahead. Car manufacturers are trying every trick to push sales. One such gimmick is free insurance offered to buyers.
Free car insurance, even if it is only for one year, is a big draw with buyers, who may have emptied out their bank accounts for the down payment. You can also expect better claims servicing because the dealer will follow up your case with the insurer. The convenience of getting all the paperwork done under one roof is another positive.

Where’s the catch?

The free insurance is not really free, but a substitute for the cash discount offered on a car. “The insurance premium for the first year to be paid by the customer is borne by the dealer,” says Madhukar Sinha, national head, personal lines, Tata-AIG General.

Besides, the free insurance may not include add-on covers. “It will typically not include the zero depreciation cover and engine protection,” says Ajay Bimbhet, managing director, Royal Sundaram Alliance Insurance. “Occasionally, these plans also offer customised benefits, but this is usually in the case of high-end vehicles,” says Arvind Laddha, CEO, Vantage Insurance Brokers.

The bigger problem is that you may never know whether you got a good deal. “The cost is not disclosed transparently. The buyer should ask for details of the insurance cover before buying it so that he can compare the price with other plans in the market,” says Laddha.

Moreover, you will have no say in the insurance company or the product on offer. The dealer will tie up with the insurer of his choice. “The insured must, therefore, understand the coverage as well as the service capabilities of the particular insurer before signing up for such a policy,” he adds.

Free life cover with SIPs in mutual funds

It’s beneficial, but shouldn’t be a replacement for a regular term cover.

Imagine a Ulip that charges you only 2.25% a year, doesn’t levy a heavy penalty if you quit investing, and doesn’t deduct any surrender charges on premature withdrawals. The SIPinsurance plans from three mutual fund houses—Reliance Mutual Fund, ICICI Prudential Mutual Fund and Birla Sun Life Mutual Fund—offer exactly this. SIP investors get a free life cover under these plans.

What’s the gain?

On the face of it, the offer looks good. You don’t spend a rupee on the free life insurance that comes with your mutual fund investments. As we said earlier, it’s like buying a Ulip without paying the exorbitant charges. “The investor gets a life insurance cover merely by having a SIP in an equity scheme at no additional cost,” says Srikanth Meenakshi, director, FundsIndia.

Where’s the catch?

The insurance comes wrapped in several terms and conditions. First, the investor gets a life cover only if his SIPs are on track. Miss two consecutive SIPs, or four SIPs in all, and your cover gets blown away. There is an exception in case of Birla SIP Century. If you have given 36 SIP instalments, the cover continues even if you stop investing. However, if you switch to another plan or make partial withdrawals, the contract terminates. Even partial withdrawal results in the insurance being terminated.

There is also a heavy exit load of around 2% if you switch or redeem the investment before the completion of the SIP tenure. So, make sure you choose a scheme that can offer stable returns over the long term. Go for a diversified plan with a good record, instead of a fund that has given jerky returns. “On the one hand, the free life insurance acts as an incentive not to discontinue your SIP during bad times, but it also means that you remain stuck with a lemon for a long time,” says Meenakshi.

Accident cover with credit cards

The cover offered is very cheap and should not make you opt for a costly card.

Personal accident insurance is a unique cover that everybody needs, but very few buy. Some credit card issuers offer a free personal accident cover along with their high-end cards. Others offer discounted prices to their customers. The option comes in handy if the card holder dies or suffers a disability due to an accident.

What’s the gain?

The biggest advantage here is that one gets covered against a risk that he would have otherwise ignored. As mentioned earlier, very few people buy a personal accident cover. Convenience is the other benefit. “The cardholder pays a small premium every month, which does not pinch his pocket, but ensures a greater protection for his family,” adds Bimbhet.
Where’s the catch?

The free accident cover comes with stiff terms and conditions. Every card issuer has a different yardstick. Some require you to use your card for a minimum amount. Others want you to make a minimum number of transactions every quarter. Some don’t consider buying fuel in the calculation. Personal accident insurance is a very low-cost cover. An insurance cover of Rs 2 lakh costs only Rs 150 a year. “The free cover does not offer any great value to the buyer. Don’t opt for a credit card only because it offers a free personal accident cover. Only if the cover is Rs 20-50 lakh does it add real value,” says Mahavir Chopra, head, personal lines and e-business, with health insurance consultancy firm, Medimanage. In other words, treat the free cover as an ancillary benefit, not the core advantage of the card.

The bigger problem is that such free personal accident covers offer basic protection against death and total permanent disability. The partial and temporary disabilities are not usually covered. So, you should buy a policy yourself, instead of depending on the free cover. Besides, the claim settlement procedure could be tedious because the claim is to be routed through the card issuer. “You have to intimate the card issuer, not the insurer. Since this is not a core function of the card issuer, expect the service to be mediocre,” says Chopra.

Term insurance with home loans

Buy regular term insurance that will continue even if the home loan ends.

Lenders don’t like to take risks. So, before they give you a home loan, they will size up your income level, repayment capacity and credit history. Even if everything is in order, they will push you to take a home loan cover along with the loan. If something happens to you, the outstanding loan will be paid by the insurance policy.

What’s the gain?

Home loan covers are usually single premium policies. The premium is paid through the loan, so the buyer doesn’t feel the pinch. “Borrowers also have the option of buying such covers directly from the life insurer. They need not pay the premium upfront, but can choose to pay it over a period of, say, five years,” says Sanjeev Pujari, chief actuary, SBI Life. Also, since this is offered as part of a group cover, individuals can get a high cover and are not required to undergo medical check-ups before buying the plan.

Where’s the catch?

Unlike a regular term insurance, loan insurance plans offer a reducing cover. As you repay the loan, the insurance cover comes down and ends when you repay the entire loan. This also means that if you choose to refinance the loan with another bank, you will lose the insurance benefit.

Besides, this cover is for the term of the loan, while in most cases a borrower prepays the loan. For HDFC, the average loan tenure at the time of application is a little over 13 years. However, as the incomes of the borrowers go up, the average loan ends in less than five years. Why pay for a 15-year plan when you actually need the cover for 7-8 years?

A better option would be to buy a regular term plan when you take a loan. Even after you have repaid the loan, the cover will continue to protect you. As the table shows, for a marginally higher premium, you can get a cover that does not diminish.

Source :The economic times.
Date : 22/04/2013

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