What is SIP insurance? Benefits of SIP insurance

Ensure the completion of your SIP tenure by insuring the instalments through an add-on life term insurance.

SIP insurance – Should you consider it

A Systematic Investment Plan (SIP) is a uniform approach towards investing in mutual funds. When you open an SIP with a mutual fund company, you agree to contribute a fixed amount to your SIP regularly, usually every month. If you don’t want to participate directly in the share market or wish to diversify your risk, SIP offers a safer route towards equity investment. SIP can be invested in debt instruments and equity, or various combinations thereof. An Asset Management Company (AMC) employs an asset manager to invest in the Assets Under Management (AUM), thereby giving an expert’s perspective to mutual fund investment.

The need for insurance

Insurance, quite simply, is the protection of assets from financial loss. The asset could be anything – your life, health, vehicle, property, shop etc. When you buy an insurance policy, the insurer agrees to cover the risk attached to the asset being insured. Insurance is a legal agreement between the insurance company and the policy buyer. The legal agreement covers the contingency associated with the insured property. The sum assured is the extent of coverage that the insurance company agrees to provide in the event of the contingency taking place. 

Risk is associated with everything that we insure. The contingency of life insurance is mortality, of health insurance is medical expenses, and structural damage in the case of vehicles. In the case of financial assets, it is the loss that the asset may incur. 

What is SIP insurance? 

SIP insurance is another innovation that AMCs have come up with to add more value to SIP and mutual fund investors. The SIP insurance option provides group term insurance to SIP investors. In the unfortunate event of the death of the investor during the SIP tenure, the insurance cover takes care of the unpaid SIP instalments. These group insurance policies are often provided at no additional cost. If you plan to invest in a SIP insurance plan, you must note that there are various conditions and criteria attached, which are likely to vary from insurer to insurer. 

Related: What to do with your money when your SIP matures?

What can one typically expect from SIP insurance?

  • SIP insurance is provided as an optional and add-on feature on selected mutual fund schemes. In other words, this feature may not be available on all the schemes of the mutual fund AMC.
  • The AMC funds the premium for the group life insurance cover and can be availed free of cost by resident individuals and NRI applicants.
  • To apply for this insurance cover, the investor must be within a specified age at the time of the first investment. This is generally between 18 and 50 years.
  • This add-on option is available only to the first or sole unit holder and is not available to the second or any subsequent unit holder of the SIP.
  • The SIP insurance option is generally available only to investors whose SIP tenure is at least three years. There is a maximum age beyond which the insurance cover ceases to exist. However, there is no maximum tenure in SIP, although the AMC may earmark 100 years minus the current completed age of the investor as a cut-off.
  • The extent of coverage generally varies with the duration of the SIP. If the coverage is 10 instalments of the SIP, it can be 50 instalments in the second year, and 100 instalments from the third year onwards. 
  • There may be a maximum insurance cover per investor defined for the SIP. 

Related: SIP vs Lumpsum Which one is right for you to invest in mutual fund?

Should you go for SIP insurance?

The first important thing to note is to not go for SIP just for the sake of the insurance. The criteria for the selection of a mutual fund scheme remains the same – a consistent growth record. This is irrespective whether SIP insurance is provided or not. Now if the scheme you select does offer insurance cover, you must find out if it affects the expense ratio. Mutual fund watchers have noted that insurance can inflate the expense ratio by 0.5% to 0.75%. Even if you opt for SIP insurance, it should not be looked at as a substitute for term life insurance. Lastly, once you open a SIP insurance account, try to continue it till the end of the SIP tenure to avail of maximum benefit. 


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