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It’s a Sham! How to spot the ULIPS sold as mutual funds

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Unit Linked Insurance Plan or ULIP is a multi-faceted life insurance product that uniquely blends the features of insurance and investments. When a policyholder pays their premium, the amount is allocated between insurance coverage and investments after deducting various costs associated with insurance such as mortality charges and fund management fees (FMC) etc.

It’s important to note that ULIPs are not purely mutual fund products, although some investors mistakenly believe they are. This confusion often stems from insurance companies’ advertising strategies, as they frequently employ terminology associated with mutual funds, such as “new fund offering” and “net asset value (NAV),” without explicitly highlighting the words “insurance” or “life cover” etc.

In fact, the explanation provided to Section 12(1B) of the SEBI Act, 1992 which was inserted by the Securities and Insurance Laws (Amendment and Validation) Act, 2010 provides that a collective investment scheme or mutual fund shall not include any unit linked insurance policy.

In this background, LiveMint has featured an article discussing how ULIPs are mis-sold as Mutual Funds (MFs), causing confusion among some individuals who are unaware of caveats such as mandatory lock-in period and the paltry life coverage they offer.

The article features views of Mr. Sumit Agrawal, Managing Partner, Regstreet Law Advisors and former SEBI officer, who observed that, “There are no restrictions within the framework for insurance companies to introduce NFOs at specific NAVs in the context of ULIPS and combination plans. A regulatory conflict between insurance regulator IRDAI and SEBI regarding ULIPS and hybrid products with an equity component was resolved through an amendment in 2010, but many issues related to investor and policyholder protection remain unresolved. Today, when a conglomerate has both insurance and mutual fund arms, its advertisements can create confusion for investors, especially if they are not well-versed in legal and financial terminology.”

Readers may want to read about the infamous regulatory conflict between SEBI and Insurance Regulatory and Development Authority of India in 2010 when SEBI issued Show Cause Notices to 14 private life insurance companies and also resulted in SEBI approaching the Supreme Court regarding the issue resulting in intervention from the Finance Ministry and legislative amendments.

Readers are welcome to send their views to Regstreet Law Advisros at info@regstreetlaw.com

A copy of the LiveMint article is enclosed below and also accessible at: It’s a Sham! How to spot the ULIPS sold as mutual funds

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