Unit-linked insurance policy exclusion

A law called SCRA says what counts as a "security" in India. Mutual fund units are on that list.

A unit-linked insurance policy looks a lot like a mutual fund unit. Both hold units. Both invest money in the market. But SCRA leaves the insurance policy off its list. It draws this line because the insurance policy also pays out on the holder's life. A mutual fund unit does not do that. This one extra feature is why the law treats them as two different things.

Chapter 8, section 8.2, working through the SCRA definition of "securities" under Section 2(h), lists units issued under any mutual fund scheme as included — and then carves out an exception: securities do not include any unit-linked insurance policy, or any similar instrument or unit, "which provides a combined benefit-risk on the life of the persons and investment by such persons," issued by an insurer referred to in clause (9) of section 2 of the Insurance Act, 1938.

The distinguishing feature the Act relies on is the combined benefit-risk on life. A mutual fund unit gives an investor only investment exposure. A unit-linked insurance policy bundles that investment exposure with a life-insurance benefit, and it is precisely that combination — issued by an insurer under the Insurance Act — that takes it outside the SCRA definition of securities altogether.

An investor buys units of an equity mutual fund scheme worth Rs 2,00,000. These units fall within the SCRA definition of "securities," so SEBI's securities-market regulatory framework, including rules on trading and disclosure, applies to them.

The same investor also buys a unit-linked insurance policy from a life insurer, paying Rs 2,00,000 in premium, where part of that premium buys investment units and part funds a life-insurance benefit. Even though this policy also holds "units," it falls outside the SCRA definition of securities, because it provides a combined benefit-risk on the investor's life and is issued by an insurer under the Insurance Act, 1938 — so it is regulated as an insurance product under IRDAI's framework, not as a security under SEBI's.

Chapter 8 (Legal and Regulatory Environment), section 8.2, "Securities Contracts (Regulation) Act, 1956," in the detailed list of what "securities" includes and the specific exclusion that follows it. Expect a question asking which of several instruments is not a security under SCRA, with a unit-linked insurance policy as the correct exception among otherwise-included instruments like mutual fund units or government securities.

• Mutual fund units are included in the SCRA definition of securities; unit-linked insurance policies are specifically excluded, despite both involving "units."
• The exclusion is based on the combined benefit-risk on life, issued by an insurer under the Insurance Act — not on the mere fact that the product has an investment component.
• This is a definitional exclusion under securities law, not a statement about the ULIP product's own features or charges, which is a separate topic taught in the insurance-focused NISM papers.