Understanding ULIPs and SIP

The reasons to invest can vary from person to person based on their financial goals. There are multiple investment instruments available in the Indian market that can help individuals build wealth over time and secure their family’s financial future. However, choosing the right investment option can be an overwhelming decision.  

One dilemma that continuously plagues investors is deciding between a Unit-Linked Insurance Plans (ULIPs) and a Systematic Investment Plan (SIP). So, before you come to any conclusion, let us first understand what ULIPs and SIP are? Further, we will discuss the difference between the two and the factors you can consider when choosing between them.  

ULIP vs SIP

What are SIPs?

A Systematic Investment Plan or SIP is a method that investors use to invest money in mutual funds. 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.

 A few benefits of investing in SIP are as follows:

  • SIP investment is a hassle-free process and requires no manual intervention for payments

  • It inculcates money-saving discipline in investors as the amount is deducted directly from the associated bank account at chosen intervals

  • Rupee cost averaging helps investors beat market fluctuations and makes their investment averse to market volatility

  • Investors can own small units of stocks with just a few thousand rupees

What are ULIPs?

A Unit-Linked Insurance Plan, or ULIP, is a unique offering wherein you can avail the benefits of both investment as well as a life insurance cover under a single plan. A part of the premium paid is used for life coverage, while the rest is invested in different types of market instruments such as bonds, stocks, etc.

A few benefits of investing in ULIPs are as follows:

  • It provides the dual benefit of investment and life insurance cover

  • Allows investors to achieve their future financial goals easily as the policy provides a five-year lock-in period

  • Allows you to partially withdraw from the investment after completion of the lock-in period

  • It offers tax benefits under the old and new income tax regimes

To say the least, ULIP allows you to earn market-linked returns while also providing an insurance cover. 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 ULIP vs SIP. The following table will help you with the same:

 

Unit Linked Insurance Plan (ULIP)

Systematic Investment Plan (SIP)

Type of Policy

ULIP investments offer life insurance as well as investment benefits.

SIP, on the other hand, is solely an investment plan.

Type of Investment Mix With ULIPs, you can invest in equity, debt, and hybrid funds SIPs are majorly equity-oriented funds.

Life Cover

 

ULIP offers life insurance coverage benefits

 

SIP does not offer any insurance benefits

Lock-In Period

Minimum of five years

For ELSS mutual funds the lock-in period is three years, while there is no lock-in period for other open-ended schemes

Tax Benefits

You can avail income 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)

Note: ULIPs issued after February 1, 2021, will be treated as capital gains if the annual premium paid is more than ₹2.5 lakh. Such policies will be taxed at 10% at maturity.  

Tax benefits are not as applicable. However, investments made in ELSS mutual funds can be claimed for deduction of up to  ₹ 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.

However, there is no option to switch between the funds chosen.

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.

Policy Regulated By Insurance Regulatory and Development Authority of India (IRDAI) Securities and Exchange Board of India (SEBI)
Fund Management Charges  1.35%  2.50%

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.

  • 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.

  • Risk 

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.

  • 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 is 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 ₹1 lakh. However, ULIPs issued after February 1, 2021, will be treated as capital gains if the annual premium paid is more than ₹2.5 lakh. Such policies will be taxed at 10% at maturity.  

  • Fund Management Charges

The fund management charges for SIP are at 2.50%, which is comparatively higher than ULIP. When clubbed with other policy charges, SIP-related fees and charges can go higher. On the other hand, ULIP has lower fund management charges, which is at 1.35%. However, you might want to stay updated on other ULIP charges as well.

Conclusion

Both SIP and ULIPs are worth considering for accomplishing near-future financial goals. However, before you choose between the two, it is necessary to evaluate your current financial state and investment objectives. Apart from this, some questions that you can ask yourself are –

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

To know more on ULIP investments in depth, you can check out these blogs:

FAQs on ULIP vs SIP

  • ✔️Should I invest in a ULIP or SIP?

     The answer to whether you should invest in ULIP or SIP depends on the following factors:

    • Your current financial condition

    • Your current expenses

    • Your current income

    • Your and your family’s future financial goals

    • Everyone’s medical needs

    Answers to these aspects will put you in a better position to decide between ULIP vs SIP for your investments.

  • ✔️What is the right time to invest in ULIPs?

    Much like mutual funds or SIP investments, any time is a good time to invest in ULIPs. With a ULIP, you can dual benefits - life insurance coverage as well as market-linked investments of your choice.

  • ✔️How can I determine my ULIP returns?

     You can use the ULIP calculator available on Finserv MARKETS to estimate the returns earned over time.

  • ✔️Can ULIPs give high returns?

     ULIP returns depend on the investment component of the policy. You (the policyholder) can choose to invest in equity funds, debt funds, or a combination of the two. The returns solely depend on the market performance of your funds.  

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