ULIPs controversy

Author : VS Warrier

Unit Linked Insurance Plan (i.e. ULIP) is a Scheme combining benefits of Life Insurance as well as Investment in the stock market. In ULIP, part of the premium amount is paid towards Life Insurance while the rest (after Administrative Charges) is invested in the Stock Market. Therefore, ULIP provides the financial safety as well as opportunity for wealth creation.

After formation of Unit Trust of India in 1963, it started a Scheme US-64 to assimilate small savings and provide benefits of Stock market to the investors. ULIP was launched in 1971 for the first time to give such benefits to the investors. This is scheme is having 2 Plans with duration of 10 Years and 15 Years and premium is payable on half yearly and yearly basis in Jan and July every year. The payment in the Plan is eligible for tax benefit under section 80C of the Income Tax Act, 1961.

When such scheme was launched, Life Insurance Corporation of India was carrying on life insurance business as a monopolist. There was neither Securities & Exchange Board of India (SEBI) nor Insurance Regulatory and Development Authority (IRDA). At that time, life insurance was undertaken as a means to provide financial coverage to life risk and to save income tax.

With the passage of time, size of the stock market grew substantially and SEBI was created by an Act of Parliament to regulate the stock market in India. With the globalization and liberalization insurance business started in private sector and with a view to regulate and develop insurance business in India IRDA was created.

In this development process, Insurance Companies came out with number of products to meet the needs of each investor. In such sequence of development, for the investment element of ULIP, number of options is made to invest in high risk securities or risk securities or secured securities or highly secured securities. Such investment is managed like a Mutual Fund.

The Insurance Companies made the investment in stock market and administrated it like Mutual Funds (MF). The investment in stock market is regulated by SEBI. The regulations required registration and approval of each scheme by SEBI. It was not obtained by the Insurance Companies for the various ULIP launched by them.

So far as, controversy between SEBI and IRDA is concerned, it can broadly be seen from two angle-legal and practical are investment big chunk of the premium in stock market as M.F. then as per the rules of MF issued by SEBI, such Scheme must be registered and approved by SEBI to carry on such business. The practical aspect is that as per the Rule of IRDA, Insurance Companies can change up to 40% of premium as Upfront Fees while as per the Rules of SEBI with effect, 01.08.08, nothing can be charged. Thus, to summarize, as per SEBI investment in stock market has to be regulated by SEBI and not the IRDA.

From investor’s point of view, they have not to worry at all. Government has already allowed seeking investment under ULIP even during the pendency of controversy, of course, if Upfront Fees would not be charged by the company, more amount will be available for investment for the benefit of the investors. On the whole, ULIP is a good scheme but very careful decision is required in selecting specific plan keeping in view the risk appetite of each individual.

The controversy surrounding the question of jurisdiction over Unit Linked Insurance Plans (ULIPs) led to a series of events. The dispute over the nature of ULIPs and under whose jurisdiction they fall caused the Central Government to come to the decision that a super-regulator was required to oversee grey areas in the Indian financial system.
As a result an Ordinance was promulgated on the 18th June 2010, and subsequently the Securities and Insurance Laws (Amendment and Validation) Bill, 2010, was introduced. The above said Bill has been passed by the Lok Sabha. Now the question is, whether there should be one regulator or more than one which could possibly have jurisdiction over a particular instrument. It is one which seems to have been answered by the Central Government by this move, which aims to provide better coordination between the financial regulators.

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