Free insurance comes with strings attached

There is nothing called free lunch in this world, but time and again financial product companies have tried to use the lure of zero-cost to attract customers. Banks today offer free life insurance for fixed deposits. Mutual funds promise free life cover for systematic investment plans (SIPs). Credit cards come with complimentary travel insurance. Even, Unit Linked Investment Plans (ULIPs) are offering insurance virtually free of cost if you stay invested for the long term. This may prompt investors and customers to ask that if insurance comes for free then what is the need to buy it separately? It is a natural question. Free insurance comes with some strings attached. Read on to know more.
SIP insurance
Three fund-houses, namely, Reliance MF, Aditya Birla Sun Life MF and ICICI Prudential MF, offer free life insurance when you do Systematic Investment Plan (SIP) of mutual funds in designated schemes with them. The life cover is free for the investor as the fund house bears the premium cost. The validity of the bundled life insurance cover depends on the age brackets. The free life cover is for individual investors whose entry age is 18 years and more and less than 51 years at the time of investment. The cover is extended up to 55 to 60 years depending on the company. The maximum life cover in this free life insurance policy is Rs 50 lakh per investor across all schemes/plans and folios. The insurance cover is only applicable if you do a SIP for a minimum of three years. There is no upper limit for SIP tenure. The investor can opt for perpetual SIP also. However, the insurance cover ceases when the investor attains the maximum age or upon the completion of the SIP tenure whichever is earlier. The insurance cover would cease to exist if there is redemption/switch-out (fully or partly) of units purchased under the scheme before the completion of the SIP tenure, or investor defaults on SIP installments for a fixed number of times.Very early death claims, that is, within a few days from the commencement of the SIP installments, are not covered, unless death is due to some accident.
“These are quite restrictive policies, if you look carefully. Plus, to get Rs 50 lakh insurance cover, you will need to invest quite a significant amount of money. The life cover is 100-120 times the monthly SIP installment. So, to get Rs 50 lakh cover you will need to invest between Rs 40,000-50,000 a month,” says Tarun Singh, a financial consultant.
Cover with card, bank FDs
Some high-end credit cards offer free travel insurance. However, do note that such travel insurance is valid for international travel only in most cases. Credit cards charge high rate interest of interest (2-3.5% per month), so they can bear small costs as long as you use such cards. Plus, high-end cards have big annual fees that help them cover travel insurance premium costs.Banks also offer one-year complimentary life cover if you open FDs. For example, ICICI Bank offers a product called FD Life whereby you open a fixed deposit and you get a group term plan life cover. It offers customers, who are 18-50 years of age, the dual benefit of investment growth via FD and security through a free term life insurance of one year for the FD holder. The free term life insurance policy is from ICICI Prudential Life Insurance. The term life cover is of Rs 3 lakh on opening an FD of at least Rs 3 lakh for a tenure of minimum two years. In case of partial/premature withdrawal of deposit, the free life cover offered to customers will be withdrawn from the date of partial/premature withdrawal. The customer gets a complimentary insurance cover for one year. The customer has the option to renew it next year.
Vaidyanathan Ramani, Head, Product and Innovation, says: “While investments and credit cards now offer insurance coverage, it is always advisable to have standalone insurance plans as they can be customised to cover your needs. Comprehensive insurance policies not only offer more holistic coverage but also offer more clarity about the kinds of risks covered. They are usually thrifty and there are many options available in the market. On the other hand, On the bundled insurances, there may be ambiguity surrounding the coverage and benefits. Such plans may also restrict flexibility owing to its linkage to the underlying item.”
Return of insurance cost with Ulips
Some new-age Ulips, from the likes of Canara HSBC Oriental Bank Of Commerce Life and Bajaj Life Insurance, are today giving you virtually free life insurance cover. Some other insurers firms are mulling offering free life insurance with Ulips. You may ask that Ulips are sold by life insurance companies and you have to pay a premium, so how are they free? The answer is simple: Ulips are a combination of insurance and investment. When a policyholder purchases a life insurance policy, he/she pays a premium to the insurance company to get a life cover. A part of the premium that funds the mortality charges deducted by the insurer, which is for providing life cover under the policy. Mortality charge depends on factors such as age, amount of coverage (sum assured) of the policyholder, gender, policy term, smoking habits, health factors, etc. This is deducted on a monthly basis by cancellation of units and is an added cost from an investment perspective. For instance, a 30-year old healthy male buying a Ulip with a sum assured of Rs 1 crore for a 20-year term may be paying over Rs 30,000 as mortality cost over the entire term. In some plans life cover charges or the mortality charges are returned after the life assured attains 60 years of age, or after 15 years.”Such features help you add back to your retirement corpus, at maturity” says Dheeraj Sehgal, chief institutional business officer, Bajaj Allianz Life Insurance.
While the return of mortality costs makes such policies less expensive, the lock-in in a Ulip or of mortality charges after a set period or maturity means that if you exit an underperforming policy, you will lose out on the benefit. So, the catch is that the cost of life insurance is returned only if you stick around for a long-term.
Dated: 18th February 2019

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