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ULIP vs SIP

By Finserv MARKETS - Feb 28,2019
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SIP vs ULIP

Different individuals choose to make investments for different reasons. However, there are several investment avenues currently available in the market, which can make it quite difficult for an individual to decide on which kind of opportunity is best for them.

One dilemma that continuously plagues investors is deciding between a Unit Linked Insurance Plan or a Systematic Investment Plan. Before we decide what policy you should opt for, let us understand what is ULIP and SIP, the difference between the two, and factors to consider when choosing between the two of them.

What are SIPs?

A Systematic Investment Plan or SIP is a method that investors use to pour their excess money into a mutual fund. With a SIP, you invest a specific amount of money at regular intervals into a chosen mutual fund account. You can choose to make the payments on a monthly, quarterly or yearly basis, depending on your convenience and financial plans.

What are ULIPs?

A Unit-Linked Insurance Plan is a unique offering where you get the benefit of both an investment as well as a life cover under a single plan. A portion of the premium paid towards the upkeep of ULIP plans is used to provide life cover to the policyholder. At the same time, the rest of the amount is invested in different types of market instruments such as bonds, stocks and funds.

Hence, this plan allows you to earn market-linked returns while also providing protection. At Finserv MARKETS, we have some of the top-rated unit linked insurance plans in the industry, which you can choose to invest in based on your life goals & risk appetite.

Difference Between ULIP and SIP

Now that we know what these investment instruments are let us understand the difference between the two. The following table will help you with the same –

Unit Linked Insurance Plan Systematic Investment Plan
Type of Policy ULIP investments offer life insurance as well as investment benefits. SIP, on the other hand, is solely an investment plan.
Lock-In Period Minimum of five years For ELSS mutual funds the lock-in period is three years
Tax Benefits You can avail tax deductions on the premiums paid under Section 80C of the Income Tax Act, 1961.

Also, the maturity amount is tax-free under Section 10(10D)

Tax benefits are not as applicable. However, investments made in ELSS mutual fund are exempted of tax for up to INR 1.5 lakh under Section 80C of the Income Tax Act.
Withdrawal Options You can make partial withdrawals after completing the lock-in period of five years. The capital amount invested can be withdrawn. However, money invested in ELSS mutual funds can be withdrawn only after completing three years.
Additional Benefits You gain loyalty benefits after completing the determined time period, and additional fund units are also issued under your plan. No additional benefits provided.
Flexibility With ULIPs, you have the flexibility to decide what portion should be invested and what goes towards life insurance.

Moreover, you also have the liberty to switch between the funds (equity to debt and vice versa), depending on your market performance.

Here, you can increase or decrease the invested capital amount to gain long-term returns on the same.
Liquidity There is no liquidity until the completion of the five-year lock-in period.

Also, you cannot surrender the policy during this time.

It provides full liquidity on the invested capital amount as per your convenience.

Factors to Consider Before Deciding Between ULIP and SIP

Every month, you’re left with a limited amount of money to invest and grow, so it’s imperative that you choose the right avenue for your finances. Let’s take a look at the factors to consider when choosing between a unit linked insurance plan and a mutual fund.

  1. Benefits

Right off the bat, the most obvious difference between the two plans is that ULIP benefits include a life cover, while Mutual Funds or SIPs do not. The investment aspect of these plans functions similarly to mutual funds, so as far as investments go, both are almost equal.

  1. Risk Factor

Since a mutual fund is purely an investment-based product, the risks here are much higher. On the other hand, a unit linked insurance plan is first and foremost an insurance product, so it provides an inherent sense of security.

  1. Management Charges

Mutual funds have a lot of fund management charges attached to them that are quite high. Some of these charges include a recurring charge, exit load and entry load etcetera. While ULIPs also attract certain charges, they are considerably lower than that of mutual funds.

  1. Tax-Savings Features

When it comes to mutual funds, only Equity-Linked Saving Schemes (ELSS) provide tax-saving benefits under Section 80C of the Income Tax Act, 1961. But since unit-linked plans offer insurance, the premium paid towards the upkeep of the product are exempt from taxes under Section 80C and Section 10D of the Income Tax Act.

Moreover, ULIPs are exempt from Long-Term Capital Gains (LTCG) tax. Mutual funds, including ELSS, are taxed under LTCG at 10% on returns exceeding Rs. 1 Lakh.

Conclusion

When deciding which investment instrument to choose from, consider answering the following questions –

  • Is life insurance coverage required?
  • What is your investment horizon?
  • What is your risk appetite?
  • What are your financial goals?
  • Do you plan to save for unforeseen expenses or retirement?

It is quite clear that if you are looking for long-term investment or wealth creation, ULIP investments are a suitable choice. The maturity benefits earned can be utilised for your child’s education, marriage, your retirement, or any financial goal that you want to accomplish.

The ULIPs available on Finserv MARKETS are safe and affordable for first-time investors. You can choose a plan according to your financial goals and how sooner you want to accomplish them.

Finserv MARKETS, a subsidiary of Bajaj Finserv, is a one-stop digital marketplace that has been created for consumers on the go. It offers 500+ financial and lifestyle products, all at one place. At Finserv MARKETS, we understand that every individual is different. And that’s why we have invested in creating a proposition – Offers You Value. A value proposition that ensures you get offers which are tailor-made for you. We also offer an amazing product range and unique set of online offers across Loans, Insurance, Investment, Payments and an exclusive EMI store. Be it in helping you achieve your financial life goals or offering you the latest gadgets, we strive to offer what you are looking for. From simple and fast loan application processes to seamless and hassle-free claim-settlements, from no cost EMIs to 4 hour product deliveries, we work towards fulfilling all your personal and financial needs. What’s more, now enjoy the same benefits in just one click with our Finserv MARKETS App!

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Bajaj Finserv Direct Limited ("BFDL"), erstwhile Bajaj Financial Holdings Limited is a registered corporate agent of Bajaj Allianz Life Insurance Company Limited and Bajaj Allianz General Insurance Company Limited under the IRDAI composite registration number CA0551 valid till 10-Apr-2021. BFDL also renders services to Bajaj Finance Limited (‘BFL’) and Bajaj Housing Finance Limited (‘BHFL’) (referred hereinafter as ‘Lending Partner’) in sourcing of customers, providing preliminary credit support activities, fulfilment services and post-acquisition customer services related to lending business. Registered Office: Bajaj Auto Limited Complex, Mumbai – Pune Road, Akurdi, Pune – 411 035 CIN: U65923PN2014PLC150522