The markets regulator recently said it plans to release a consultation paper on a new product that combines mutual fund schemes with term insurance. Given the underwriting concerns & implementation challenges, fund houses may not be too enthused, explains Ananya Grover
Are there any bundled products in the market?
There are already similar bundled products — in Unit Linked Insurance Plans (ULIPs) offered by insurance companies, stock market investment is provided as an additional benefit with the insurance policy. The objective was to offer higher returns to policyholders through a market-linked product, since on a traditional product returns were much lower and that too, in case of demise of the policyholder or at the end of the policy term. These plans come with a lot of charges and fees: for premium allocation, policy administration, fund management, mortality and surrender charges. Industry watchers say investors continue with these products due to the hefty fines charged on surrender of such plans.
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However, the new proposal aims to bundle mutual fund schemes offered by asset management companies (AMC) with a life insurance cover. The objective here is to ensure greater financial inclusion, and reach the last mile, where the value of systematic investment plans (SIP) is very low and mostly coming from interiors of the country, as the Securities and Exchange Board of India (Sebi) puts it. The idea is to allow insurance to piggyback on mutual fund products as the latter has been growing at a fast pace.
Till 2022, when Sebi barred mutual fund houses from offering bundled products, many AMCs were offering free term life insurance as an additional feature to attract individuals to invest in their schemes via SIPs. In June 2024, the insurance regulator had released a circular barring the promotion of ULIPs as ‘investment products’.
Underwriting poses a challenge
However, the proposal raises more questions than answers. Insurance companies use underwriters to evaluate the risk of onboarding an applicant based on various factors to ensure that the companies maintain a balanced risk portfolio and also determine the value of premium to be charged. While this product proposes to offer premium at lower costs, mutual fund houses will have to invest in creating underwriting infrastructure.
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