Mutual Funds Meet Life Insurance: Sebi’s New Offering Aims To Simplify Investment And Protection

The Securities and Exchange Board of India (Sebi) recently declared that it has been working on a new financial product that combines mutual fund investments with life insurance. This will help investors with an affordable solution that pairs mutual funds with term life insurance. India still has low insurance penetration, and Sebi wishes to leverage the popularity of mutual funds, especially in tier two and three cities. 

However, such a product is unlikely to join soon, as per media reports. Let us take a look at why such products may be a good idea and the challenges in launching such products. 

Pros And Cons 

While it's ultimately a matter of personal preference and individual financial goals, there are both advantages and disadvantages to bundling investments and insurance.

It is convenient to have both investment and insurance components in a single product as it simplifies financial planning and management of products. Also, bundled products have been found to lower costs and fees compared to purchasing separate products. So a combo can combine wealth accumulation through financial protection via insurance, addressing multiple financial needs in one package.

“However, bundled products can be more complex, making it challenging for investors to fully understand the terms, charges, and benefits. Also, costs and charges in bundled products may be less transparent, making it difficult to evaluate the true value of the product,” says  Madhupam Krishna, Sebi-registered investment advisor (RIA) and chief planner, WealthWisher Financial Planner and Advisors. 

Challenges Of Bundled Mutual Funds And Insurance Products 

“There are several challenges and operational concerns that need to be addressed before the product can be launched,” says Krishna. They are: 

Investor Servicing: Most MF offices are in big cities and handled by a small staff. Mutual fund companies are not equipped to handle the servicing requirements of insurance products, such as medical tests and claim processing.

Operational Costs: Onboarding, KYC & recordkeeping is still costly for mutual funds as these are handled by separate agencies. Hence, servicing insurance customers would add significant costs to mutual funds, making it difficult to offer the product at low premiums. 

Claim Processing: MF staff is not equipped to handle claims or do field surveys. Also, the cost will add up for these functions if they are outsourced. Products like health have frequent claims. Can the current MF setup handle this?

Underwriting Issues: Asset management companies (AMCs) lack the infrastructure to handle insurance underwriting, which involves actuarial science & assessing various factors to determine premiums.

How Will They Differ From ULIPs 

It is important to understand that these products would differ from unit-linked insurance plans (ULIPs) which combine insurance and investments. 

“Unlike ULIPs where premiums are split internally, combo products would maintain clearer boundaries between mutual fund and insurance components. ULIPs have higher charges due to their integrated structure; this combo product is aimed to minimize additional costs.

The distinct components in a combo product could make costs and benefits more transparent than in ULIPs,” says Abhishek Kumar, a Sebi-registered investment advisor (RIA), and founder and chief investment advisor of SahajMoney, a financial planning firm. 

Also, these products will be regulated by different bodies. “Combos will be managed by mutual fund companies, whereas ULIPs are managed by insurance companies. Similarly, the regulator for combos will be Sebi. ULIPS are regulated by the Insurance Regulatory and Development Authority (Irda),” says Krishna. 

In fact, such a product existed in the past. UTI Mutual Fund offered a scheme that combined life protection with a tax-saving mutual fund option.  “This product was launched in 1971 and accumulated a portfolio value of Rs 5,434 crore by December 2024. While existing investors can continue to participate, the fund is no longer accepting fresh applications,” says Kumar.