ULIPs till now were sold with a one-year lock-in period that attracted a mid-term investor who would otherwise opt for a mutual fund. Even though a ULIP is a life insurance product, it was at times hawked as an investment instrument which also offered an insurance cover.

Now IRDA says that sum assured on maturity of ULIPs cannot entirely be linked to the capital market performance. The new guideline has said that such guarantees provided on death or on maturity shall be reasonable and consistent in relation to the current and long-term interest rate scenario. In this regard, a demonstration of proper pricing shall be required under the file and use procedure.

The new guidelines would help customers understand the product better and may result in some people dropping ULIPs from their investment basket.

The guidelines hint that ULIPs need greater participation from the insured and the insurance advisor.

Insurance companies are likely to take a call on their agents trying to hardsell these products, ignoring the insured's risk appetite. "Investors too need to make an informed choice before buying such products," feel insurance industry observers.

While most companies admit that their agents are generally trained not to push products without correctly analysing the investors' risk profiles, there have been many instances of mis-selling linked products, which is why the IRDA decided to come up with a new set of guidelines.

"The new guidelines need to be viewed in the right spirit and we are confident that it will help the players serve their customers better," industry observers said.

Investors need to be proactive and equip themselves with information on the type of investments they are interested in, rather than just give a passive hearing to the financial advisor selling the policy.

The basic features of the life insurance contract in ULIPs should highlight its long-term nature. The language used should remain simple and be transparent in all aspects of the product terms and conditions. Further, a standard method should be adopted across the industry to compute net asset value (NAV).

Regarding disclosure norms, IRDA has asked all life insurers to explicitly give information regarding the definition of all applicable charges, method of appropriation of these charges and the quantum of charges levied. The regulator has also mentioned that there is a cut-off up to which the insurer reserves the right to increase charges, subject to prior clearance of the authority. No statement of opinion as to the performance of the fund shall be made anywhere.

Further, any advertisement by insurance companies should clearly distinguish ULIPs from traditional life insurance products and also make clear that the premiums and funds are subject to certain charges related to the fund or to the premium paid.

The contingency on which the guarantee in ULIP, if any, is payable and the exact quantum of such a guarantee should also be mentioned. The emphasis on past performance should be reduced and references, if any, made about past performance should include compounded annual returns (as per standardised computations) for the previous five calendar years, expressed as a percentage rounded to the nearest 0.1%.

IRDA has also asked all life insurers to furnish data on switching options exercised by policyholders, premium re-directions exercised by policyholders, partial withdrawals, top-up premiums received, multiple insurance cover granted and the expense ratios and performance for each fund. All this data is to be filed every six months.

IRDA has also suggested that life insurers should move towards the evaluation of their respective unit-linked funds by an independent rating agency to provide qualitative information to policyholders.