ULIP: Whose Baby Is It Anyway?

ULIPs, one of the most popular products offered by insurance companies, have been in the news ever since SEBI banned 14 life insurance companies in the private sector from raising funds through these plans.

ULIP is a unit-linked insurance plan. This is a type of investment where the characteristics of insurance and mutual funds are combined. Accordingly, a part of the premium is utilized towards the insurance cover as well as the administrative charges and the rest is invested as per the option selected by the investor. On the other hand, a mutual fund is a pure investment option that provides long-term growth through capital appreciation as well as dividend distribution. While ULIPs are regulated by Insurance Regulatory and Development Authority (IRDA), mutual funds are regulated by Securities and Exchange Board of India (SEBI).

The rift between the two regulators began when SEBI issued show cause notices to some life insurance companies early this year asking as to why action should not be taken against them for selling ULIPs without its approval. SEBI’s premise was that since these products invest majority of their corpus in the capital markets, insurance companies should have taken its approval before launching them. Interestingly, the Central Board of Excise and Customs (CBEC) too had opined in February 2008 that ULIPs bear similarity to mutual funds.

However, insurance companies contested this by saying that ULIP is a life insurance product and hence is not covered under the definition of securities under the Securities Contracts (Regulation) Act, 1956. They have further added that insurance cover was the predominant feature of a ULIP and hence mere existence of an additional investment feature does not make it an investment product.

In the IRDA and SEBI’s recent spat, IRDA directed the insurance companies to ignore SEBI’s notice and continue selling ULIPs. In fact, it was the Finance Minister’s intervention that restored the status quo for ULIPs. For now, the government has directed IRDA and SEBI to go the court to decide as to who will regulate the investment part of ULIPs. Obviously, both the insurance companies and the policyholders heaved a sigh of relief.

The key issue is, is there any need for more stringent regulations on ULIPs? If yes, is the joint regulation by