ULIP or Unit Linked Insurance Plans are insurance schemes with investment components which can be parked in equity, debt or a mix of both. They give insurance buyers a variety of investment options to choose from.

Close to 100 new versions of ULIP are launched and going to be launched in the coming days. Insurance Regulatory and Development Authority (IRDA) of Indian government guidelines on ULIP are an attempt to increase the ‘Insurance’ aspects of ULIP and curb their appeal as speculative investment products.

The lock in period in ULIP will go up after the new guidelines. ULIP will have at least a five-year lock-in period, as against three years in the earlier version. After the new guidelines, ULIP will not be attractive for those investors who want to make money quickly.

Another important change is the increase in their insurance component. Unlike the earlier version, where the insurance component was nominal, the new schemes will have an insurance cover of at least five times the annual premium.

Apart from these changes, the new IRDA guidelines also touches on partial withdrawals after three years, number of free switches available, and the variety of options available to receive benefits on maturity of the schemes among others things. It also asks for more disclosure on risk factors. These changes will make ULIP a more transparent product.

According to financial advisors, insurance companies were positioning ULIP more as an investment product. Insurance advisors were selling ULIP like a mutual fund because of their higher equity component. Since the stock market was performing well, they could sell it easily on the basis of decent performance.

If you are looking for a decent return from your insurance policy ULIP is for people who are looking for long term returns. But you shouldn’t treat them like a mutual fund which could be a medium-term investment also.

ULIP or Mutual Fund:

That brings us to the eternal battle of ULIP against mutual funds. The devotees of funds pick many holes in ULIP. Their main argument is that ULIP are not an investment vehicle, but insurance plans which also offer a few investment options. Mutual funds, on the other hand, are pure investment vehicles. They are right. So, if you are buying a ULIP, be aware that you are investing a part of your premium in stocks to earn better returns than a regular endowment plan. Unlike an investment scheme, you just can’t leave an insurance plan. If your fund is underperforming, you can get out any time. That’s not advisable with an insurance scheme, as you would lose money and end up paying higher premium for a new insurance plan. The best way is to buy a term insurance plan and invest the rest in a mutual fund to avoid the confusion.

To conclude we are giving the salient features of Investment versus insurance:

(i) ULIP are insurance plans that offer a variety of investments options

(ii) Investments options include equity, debt or a mix of both

(iii) The new IRDA guidelines makes it unattractive for speculators looking to make money in a short period

(iv) If you are looking for decent long-term return from your insurance plan, ULIP are meant for you

(v) The best way, according to purists, is to buy a term plan separately and invest the rest in a mutual fund scheme