How Beneficial Are Equity Linked Saving Schemes (elss) With Life Insurance As An Add On

The going has been tough for equity-oriented schemes from the last one year. All these schemes are giving negative returns, and it is very difficult to convince investors to make further investments in this area. Equity-Linked Savings Schemes (ELSS), which are tax saving schemes with a diversified nature, are also facing a similar situation. In order to increase the effectiveness and appeal of the schemes among investors, there has been a move towards offering additional facilities such as insurance. Several fund houses have started coupling insurance policy with their funds, and hence this needs to be considered in terms of the actual benefits and the manner in which this will work for investors.

Nature of insurance

The first thing that an investor has to understand is that the insurance that is being offered is just an additional facility for him/her. This facility should not be considered as a means to complete the basic insurance requirement of the individual. This is because the amount of insurance available is far less and also the nature of the insurance might also not meet the requirement of the investor.

There are generally three main types of insurance that are actually offered along with the ELSS schemes. The first is the life insurance that is available in case of death of the individual whereby the dependants will get a specified amount from the insurance company. The second type of insurance is accident insurance where there is a payout for the investor and the dependants only when there is a death due to an accident, and not in the normal course of events. The difference in both these types of insurance is that the latter might not be eligible for the investor to claim under several circumstances and due to this reason this is likely to be used sparingly.

The third type of insurance is a critical illness cover where several chronic illnesses like cancer would be covered for treatment for the individual. This insurance is also useful for those who do not have such a cover and might suffer from the specified illness.

Amount of insurance

The amount of the insurance that is being provided is also important and an investor should understand that higher the amount of insurance, the better it is for him/her. In several cases, the insurance cover is so low that this does not have much value for the investor. Bringing the nature and the amount of the insurance together will ensure that the individual investor is able to understand the real benefit of the insurance and the manner in which this can actually be useful for him/her.

Cost of insurance

The other part that is also important for an investor is the cost of the insurance. There is a cost that is involved due to the payment of the premium for the insurance that is taken for all the investors in the scheme. There has to be some payment of premium and the manner in which this will be paid is important for the investor.

There are some fund houses that actually charge the cost of the insurance to the expenses of the schemes, making investors pay the cost out of their own pocket. The investors might not know it as this is not charged separately but will be adjusted in the net asset value of the scheme automatically, so they pay it indirectly.

There is also another option that is often followed by the mutual fund asset management company and this is to pay the cost of the insurance themselves. Here, the cost is not passed on to investors. This is a case where there is an additional benefit available for the investors because they are actually not paying for the insurance cover unlike the other case where they are indirectly paying the cost for the insurance being provided. This factor also has to be kept in mind while the entire insurance offer is being evaluated. However, one important point is that the investment should not be bought just for the insurance but the insurance should be considered as an additional benefit.