Systematic Investment Plan or SIP is very popular with mutual fund investors. Investing as little as Rs 500 a month via a SIP can help build wealth over the long-term. The keyword here is: long-term or broadly speaking, time. What if time is suddenly cut short with your untimely death? If the regular SIP installment does not arrive, then the wealth-creation journey for your family will stop. This is why if you do SIP, you must also TIP. No, we are not talking about tipping somebody. Do a Term Insurance Plan (TIP). So even if the SIP installments stop, the TIP will spring into action and complete your original wealth creation goal even if you are no longer there. Read on to know more.
Pitfalls of only SIP
Systematic investment plans of mutual funds are a great example of automated investing. Once you complete the formalities, the SIP installment automatically goes from your bank account to your mutual fund account without any intervention. Plus, investing regularly, every month, means that you also get to buy MF units at highs and lows, thereby lowering your costs over the long-term. The best performing SIPs have delivered over 20% return annually for time periods like 10, 20 years. Let us see what that means. This means Rs 5,000 invested every month for 20 years (240 consecutive months) would have become Rs 1.6 crore. Do remember that each Rs 5,000 monthly SIP has to happen for 240 months.
Let’s assume you die after 10 years. This means you have completed SIP for 120 months. Do you know how much amount would have been accumulated? Not Rs 1.6 crore. Not Rs 1 crore. Not even Rs 50 lakh. Not even Rs 20 lakh. If you did a SIP for Rs 5000 a month for 10 years, then you would have invested Rs 6 lakh. At 20% annual gain, the Rs 6 lakh would have become Rs 19 lakh in 10 years. Those are great returns, but your corpus is nowhere close to the Rs 1 crore your family would nee!
If you did not die after 10 years and actually die at the end of 15 years of SIP investments, the corpus would be Rs 57 lakh. Still, shy of the Rs 1 crore targetted corpus!
A SIP, while being a wealth generating tool, does not really protect your corpus goal once you can no longer invest. Of course, there are some mutual fund companies that give a SIP insurance but most of them are capped at Rs 25 lakh to Rs 50 lakh sum insured per investor. But if you want to leave a bigger corpus for your family for a comfortable life (Rs 1 crore invested in a bank FD can at the most generate Rs 9 lakh annual interest income), you need a better plan.
TIP with SIP
You may have heard about term insurance. For a fixed annual upfront cost, you buy a financial protection cover. For a 35-year old, a Term Insurance Plan (TIP) costs a few thousand for a sum assured of Rs 1 crore. For example, life insurance companies offer you a Rs 1 crore TIP for a monthly cost of Rs 900-1,100. This means if you die after 60 days, your family will immediately get the Rs 1 crore claim amount; no questions asked.
In case of a pure SIP, you would have accumulated just a few hundreds. That’s it. That is all you can get and leave for your hapless family. But when you combine a SIP of a mutual fund company with a TIP from a life insurer, your corpus goal is always protected.
A TIP ensures that whenever you die, your family’s financial protection money is never compromised. None of us knows when is our last day. We make plans. A SIP is a good plan only if you are alive. Once you combine a SIP with a TIP, the same financial plan is ring-fenced from all eventualities. The TIP component just like an umbrella is handy when dark clouds hover around your family’s needs.
If you do not die at the end of 20 years, all you lose out is the TIP premium. But on the other hand, your SIP’s wealth generation capability ensures that the targetted corpus is built.
If you pay Rs 5,000 a month as SIP, adding another Rs 900 for TIP is not difficult for you. A TIP with SIP works like a team, with the TIP taking care of financial protection if you are not alive and the SIP takes care of the wealth creation objective.