Because this product is so unusual, it's probably not quite clear how this works, so let me explain through a detailed example. Let's say that a forty-year old person decides to invest Rs 20,000 a month till he is fifty-five years old. This amounts to investing Rs 2.4 lakh a year, or Rs 36 lakh over the entire fifteen year period. He decides to invest this money in a Systematic Investment Plan of an equity fund. Based on past experience, he expects to earn an average of perhaps 15 per cent a year on the investments he makes.
He starts investing and for five years, everything is fine. His has invested Rs 20,000 a month for five years, which comes to a total of Rs 12 lakh. His investments have yielded an average of about 15 per cent a year and are now worth a total of Rs 17 lakh. At this point, an unfortunate mishap occurs and he passes away. Normally, that would be the end of the investment plan. Of the Rs 36 lakh he originally intended to invest, he could invest only Rs 12 lakh before he died.
However, if this person had invested in the insured investment products that I'm talking about, then this would not be the end of the story. The 24 lakh that he couldn't invest because he died will be paid to his family by the insurance company. So his family gets the Rs 41 lakh which is Rs 17 lakh (the current value of the 12 lakh that he was able to invest), plus the 24 lakh that he intended to invest but couldn't because he died. His family could then invest the money and thus make sure that the financial plan is not disrupted. This isn't like a normal insurance where the amount you are insured for stays constant. Instead, the amount insured keeps decreasing. At any point, this amount is equal to what remains out of the original investment plan that the investor signed up for.
The obvious question is who pays for the insurance. After all, if the insurance company is covering the risk of the investor's death, then the investor must be paying the premium somehow. The answer is that this premium is paid in the form of an extra one per cent load that is deducted out of the money that is invested. Normally, fund companies charge a load of 2.25 per cent out of the investment you make. In the case of this product, this load is one per cent more. For Rs 20,000 a month, that comes to an extra Rs 200, which would strike most of us as a fair price to pay for the peace of mind that this product offers.
What is interesting is that there is no lock-in and there's no obligation. If you want to pull out of the scheme at any point then you can just stop investing and withdraw your money. Such product, with minor variations, are offered by a number of fund companies including Kotak, DSPML and Reliance.
The obvious downside is that this product ties one to a particular fund company for a long period of time. I think that's where one should spread the risk a bit by splitting one's investment across funds from different companies.
Few things to know before you decide your SIP + Insure
1. Is there a minimum amount that has to be invested in the SIP?
2. Must the SIP be of a certain tenure?
3. Are all equity schemes of AMC, eligible or is it offered only on certain schemes?
4. Will the insured amount be given to the nominee or be used to continue with the SIP so that the investment plan continues?
5. Will all the insurance expenses be borne by the AMC?
6. Is there any age limit to avail of this scheme?
