Capital guarantees by insurance companies are back in vogue as insurers are offering to protect investors from possible capital erosion.

For investors, this is like having the best of both worlds: they get market-related returns from investing in unit-linked insurance plans and the capital is protected.

"These guarantees are ideal for people who are keen to buy a ULIP but ulitmately purchase a traditional policy as they are apprehensive about the risks the market presents," said Shikha Sharma, CEO ICICI [Get Quote] Prudential Life. The private insurer recently launched InvestShield.

Guarantees on ULIPs are not restricted to India. Many investors in the US are also banking on guarantees when they invest in ULIPs, said Venkatesh S Mysore, managing director, MetLife India Insurance Company.

In the past, many insurance companies had come out with guaranteed returns on traditional plans. However, as interest rates started moving south, many insurance companies reduced the level of guaranteed returns.

New product launches dropped the guarantees. Today guarantees are back. This time round, they are being offered on ULIPs even in the wake of a volatile stock market.

Many life insurers have come out with innovative product offerings on the ULIP platform, aimed at protecting investors' capital. A number of life insurance companies--ICICI Prudential Life, Kotak Mahindra Old Mutual Life, ING Vysya Life and Aviva [Get Quote] among others -- are offering guarantees on investors' capital.

The high volatility in the stock markets tends to scare many an investor, who fear losing their long term life savings, said ICICI Prudential Life executives.

Studies show that most policyholders seek insurance cover as the ultimate protection tool, and an integral part of financial planning. "Policyholders put security ahead of high returns when it comes to buying an insurance plan," said insurance actuaries.

Though ULIP has become the most popular insurance product today, many policyholders prefer to invest in endowment plans, which offer security.

ULIPs are essentially insurance plans which offer market-related returns as the risk is passed onto the investor; the returns on the plan depend upon the performance of the market, be it equity or debt.

"We want to encourage more policyholders to buy ULIPs as these offer a higher rate of return in the long run as compared to traditional plans," said Kotak Mahindra Old Mutual officials.

Capital guaranteed plans such as ICICI Prudential's InvestShield range of products, promise to cushion the policyholder from market shocks, and offer the benefit of market returns while protecting the downside.

"We offer all the upside and protect policyholders from the downside," said a spokesperson for Birla SunLife Insurance Company.

Of course guarantees come at a price. A percentage of the premium is allocated towards the guaranteed portion. For instance in the case of InvestShield, the risk on investments due to the market is protected by a guarantee, which keeps increasing every year.