THE END OF BUNDLED MUTUAL FUNDS
The regulator now wants insurers to launch customised, innovative products and give customers more choice and benefits
On June 17, market regulator SEBI instructed the Association of Mutual Funds in India (AMFI), the MF industry body, to terminate bundled mutual funds. For several years now, there have been mutual fund schemes that bundle life insurance on select schemes as well as SIPs. Likewise, two asset management companies (AMCs)—LICMF and UTI—have for long managed and run two schemes that mix insurance with investments, somewhat similar to the unit-linked insurance plans (ULIP) offered by life insurers. These mutual fund schemes offer mortality benefits that pass to the nominees of the investor on death.
For many years now, mutual funds have bundled life insurance with schemes to attract long-term investors. Such bundled products are available with the SIP option in investments. The sum assured is typically linked with the amount and tenure of the SIP. For instance, an AMC would fix a minimum tenure on the SIP to take advantage of the insurance benefits, which could be three years to begin with. The sum assured as part of the insurance component would range anywhere from 100-120 times the monthly SIP instalment or capped at Rs 50 lakh.
The insurance cover in such cases is the pure risk term policy with no savings or investment component. Moreover, the bundled term plan is like a group insurance that the AMC buys from an insurer with the investors who opt for such a scheme being the members in the group. This has been a very good tool to take additional life insurance cover with just a self declaration or undertaking of good health by the insurer at the time of taking such a bundled product. This is a good way to take life insurance for people who may otherwise not get a policy due to their age or the policy premiums on a standalone policy is too high for them.
Likewise, for several investors following the goal-based investment plan—such an investment option allowed them to be prepared for eventualities without compromising on the financial goal. The death benefit in these products would ensure that the investors get an assurance that there will be money as per their investment plans even in the case of the death of the investors committing to the SIP. For AMCs, such a bundled product allowed them to attract investors which also encouraged them to stick with a scheme to keep the insurance cover on.
The cover, in the case of such mutual fund schemes, would cease by the age of 55 years of the investor, or as the SIP matures or if it
THE BUNDLED TERM PLAN WAS A GOOD WAY TO GET LIFE INSURANCE FOR THOSE WHO OTHERWISE COULD NOT AFFORD A POLICY DUE TO AGE OR HIGH PREMIUMS
got cancelled for any reason by the investor. In most cases, the insurance would kick in immediately after signing up for an SIP. The standard exclusion is suicide in the first year of SIP, and the costs towards providing the life insurance were borne by the AMCs. The AMC was not underwriting the risk associated with the insurance on its own, which meant that it was not in any way getting into a breach of regulations.
In the case of unit-linked insurance schemes from LICMF and UTI, fresh subscriptions are on hold, even as both AMCs wait for clarity from SEBI on the schemes they are running as they were approved by the government of India. As for the mutual funds bundled with SIPs, it’s a good innovative option for investors as the risk cover is taken care of. Also, as investors didn’t have to pay any additional money towards the insurance, it did not impact the money invested. So, while existing investors who opted for the mutual fund plus insurance option continue to be insured, the facility will not be available for new investors.
➘ FLEXIBILITY FOR INSURERS
Insurance regulator IRDAI has allowed life insurers to follow a ‘use and file’ norm after allowing health insurers a similar option. What this means is that insurers can now launch a new policy in the market and apply for approval within a certain time frame later. Life insurers can introduce new products in individual term policies, ULIPs, group term and riders including term, accidental death, disability, critical illness and terminal illness. Insurers now have the flexibility to launch customised and innovative products and fix up its premium price.
The circular from the regulator expects this move to enable life insurers to launch products in a timely manner, according to the dynamic needs of the market. This is a way to expand the choice for prospective policyholders, but the policies they can launch are ones that are not individual savings linked or in the realm of pensions and annuity.
So what more innovations can one see in the life and health insurance space? Well, it can encourage insurers to launch policies that are simple and straightforward for policyholders to understand with clearly detailed policy benefits. Prospective policyholders should make it a point to carefully read the benefits offered in such schemes, lest they take a policy that costs less but also provides for very limited or narrow insurance cover. For instance, an accident death benefit policy available only in case of accidents on a national holiday would have a very limited scope. ■