Why has SEBI barred mutual funds from bundling insurance products?

This move had been in discussions for quite some time but now SEBI has finally acted and asked that funds should not launch bundled insurance any longer. Normally, the insurance cover was offered free and used as an add-on to attraction by the fund managers. SEBI was never too happy with this practice of bundling insurance with mutual funds and it has not acted by banning such bundling in future. This was a common practice in SIPs where the funds gave 100-120 times of the monthly SIP as the insurance cover.

The fund offered this as a free addition and in the event of any exigency to the sponsor of the SIP, this insurance ensured that the SIP did not stop. This was useful in the sense that the long term goal to which the SIP was attached did not get impacted. Now SEBI has mandated that no such bundling of insurance along with mutual fund sales will be permitted for any scheme going ahead. These will have to be standalone MF products only and sold as mutual funds without any add on insurance products attached to it.

The question that arises is why is SEBI so particular about unbundling insurance? For SEBI, there were some inherent flaws in the bundling of insurance and mutual funds; since one is an investment product and the other is a risk cover. The much bigger concern for SEBI is that such bundling could result in mis-selling of a mutual fund product. It could sold as an endowment product; which it is not. Alternatively, the mutual fund could also be sold as an assured return product, which is misrepresentation of the risk involved.

At a more macro level, the basic rule of financial planning is to keep investments and insurance separately. That has been the argument against ULIPs and endowments since both mix up investments and insurance. There is also a high degree of uncertainty on the regulation front, since insurance has a separate nodal agency (IRDAI) to regulate its operations. It is believed that such unbundling will simplify the MF product and avoid mis-selling. The good news is that most funds have already wound up such schemes.