SEBI Chief Proposes the Idea of Bundling Insurance with Mutual Funds

Here's what Ms Buch said:

"We are now proposing to come out with a consultation paper again, to try and include insurance pure and simple vanilla life, term life insurance, along with our mutual funds, which is our main product for financial inclusion, and so that we are able to go, including to people where we have very, very low-value SIPs coming from the hinterland, and to be able to offer them a combo product of term life insurance along with the mutual fund investment"

This proposal is a stark deviation from earlier, where in June 2022 (when Ms Buch's term had started) the capital market regulator in its letter to the Association of Mutual Funds in India (AMFI) advised to stop offering mutual fund schemes with insurance coverage -- a bundled product. This benefit was optional for investors.

[Read: SEBI Bars Mutual Funds from Bundling SIPs with Insurance]

Consequently, many mutual fund houses, such as ICICI Prudential Mutual Fund, Aditya Birla Sun Life Mutual Fund, Nippon India Mutual, and PGIM India Mutual Fund, who were bundling insurance products (life cover) with investments in their schemes via Systematic Investment Plan (SIP), stopped offering combo products.

Typically, these combo or bundled products were offered to individuals between the age group of 18 to 55 years. The life insurance cover was a specific multiple of the monthly SIP amount. The limit on the maximum life cover varied from fund house to fund house. And in the case of the demise of the investor, the nominee received the sum assured of the life cover and the investment value in the fund.

What Changed and Why is SEBI Coming Up with a Consultation Paper for Combo Product Now?

Well, there appears to be a perceptible change in the line of thinking. The main objective, as evident from SEBI Chief's statement, now is greater financial inclusion.

The plan is to reach the last mile, where the value of SIP is very low mostly coming from interiors of the country, remote areas, or hinterlands.

Currently, a fact is that life insurance penetration (measured by the number of people covered) has dipped to 2.8% as of FY 2023-24 from 3.0% in the previous fiscal year, shows the Insurance Development Authority's (IRDA's) latest annual report. This is a cause of concern. Currently, India's life insurance penetration is below the global average of 3.0%.

However, the glimmer of hope in the life insurance penetration data is the insurance density (the ratio of total insurance premiums to the country's person), which has remained stable at USD 70 with a consistent uptrend in the insurance density since 2016-17.

At present, a majority of life insurance products are complex and individuals often buy endowment plans, money-back plans, and/or ULIPs instead of a pure term life insurance plan for risk cover. In other words, people are commingling insurance with investments and not strictly looking at risk cover.

[Read- ULIPs vs Mutual Funds: Which One Should You Choose]

SEBI Chief's statement makes it clear that the plan is to offer pure and simple vanilla term life insurance along with mutual funds.

Is Bundling Insurance With Mutual Funds a Good Idea?

While bundling mutual funds with insurance by offering low or small SIPs may seem an affordable proposition, the insurance coverage that such a combo product would offer may not be adequate considering your Human Life Value (HLV).

HLV is nothing but the sum of the monetary values of all future needs an individual's spouse and dependents need to be financially protected and, therefore, should be carefully assessed -- it cannot be done arbitrarily.

As an individual, while you may be allured with the idea of getting two birds with one stone -- insurance and investments -- ideally, it is advisable not to combine the two; they should be dealt with separately. Doing so helps maintain clarity and efficiency.

For life insurance purposes, it is wise to buy a separate term insurance policy from a reputed and financially strong insurance company. This shall offer better cost-to-benefit, i.e. keep premium relatively low and offer a higher life insurance cover or Sum Assured.

For wealth creation purposes, wherein the endeavour is to earn decent real returns (also known as inflation-adjusted returns) and achieve the envisioned financial goals, mutual funds are a meaningful investment avenue. Nonetheless, care should be taken to choose not just the best but also the most suitable mutual fund schemes out there considering your risk profile, broader investment objective, the financial goals you wish to address, and the time horizon to achieve those envisioned financial goals.

It is important to be thoughtful in your approach.

Happy Investing!

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This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.