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ULIP vs SIP - Which is the Best Investment Option?
ULIPs and SIPs put your money in the market, but they aren’t the same product. A ULIP is an insurance policy that invests part of your premium. An SIP is just a method of investing a fixed amount in a mutual fund scheme, with no life cover attached to it. The other factors in which these two products differ are lock-in, fees, tax treatment, and returns. The perfect fit for you depends on all of these factors.
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- ULIP vs SIP
What is a ULIP?
A Unit Linked Insurance Plan(ULIP) combines the benefits of life insurance and investment in a single product. Your premium is divided into two portions, one of which is used as life cover during the policy term while the remaining is directed towards market-linked investments through the funds of your choice. You are also allowed to switch between funds according to your financial goals. The plan has a mandated lock-in period of 5 years. Click to know more.
What is a SIP?
A Systematic Investment Plan (SIP) is a method of investing a fixed amount of money regularly in the mutual fund of your choice. Unlike ULIP, it is not a product but an investment tool. An SIP allows an investor to smooth out short-term market fluctuations and average out the NAV of units in a mutual fund in the long run. An SIP also allows for high levels of liquidity and flexibility and has no lock-in period except if you choose to invest in an ELSS fund through an SIP. Note that each monthly contribution in ELSS is locked in for 3 years. Click to know more.
Difference Between a ULIP and SIP Plan
Below are the differences between ULIP and SIP:
| Parameter | ULIP | SIP |
| Nature | Insurance + Investment | Pure Investment method |
| Investment Objective | Suitable for investors who want to combine life insurance with long-term wealth creation | Ideal for investors who want to grow money gradually without needing insurance |
| Costs, Fees & Tax Benefits | Charges fund management and premium allocation fees; offers Section 80C deduction and tax-free maturity under Section 10(10D) | Low-cost investment; ELSS SIPs allow Section 80C deduction, while other mutual funds attract capital gains tax |
| Flexibility & Usefulness | Allows fund switching and partial withdrawals after 5 years | Allows changing contributions, pausing, or switching funds almost anytime |
| Lock-in Period | The lock-in period for a ULIP, as set by IRDAI, is 5 years. | ELSS SIPs have a 3-year lock-in; other SIPs have no lock-in and can be withdrawn anytime |
| Returns Potential | ULIPs offer high returns with equity-oriented funds averaging 10-13% CAGR over 5-10 years, while the best-performing funds average above 18%. (Value Research data via Policybazaar on 12 August 2026) | Equity SIPs can deliver 14% to 18% over 10 years, driven by compounding and rupee-cost averaging |
| Risk Level | Carries market-related risk; returns move with the funds you pick. Separately, if your sum assured is below 10 times the annual premium, the policy loses its Section 10(10D) exemption, and the 80C deduction is restricted. | Returns depend on market movement; equity SIPs are more volatile, debt SIPs carry lower risk |
| Charges | ULIP charges are deducted from the fund as units for the various services provided by the AMC | Can include charges such as expense ratio and exit load |
| Tax Benefits | Section 80C deduction and tax-free maturity within premium limits; higher premiums may be taxable | ELSS SIPs get Section 80C deduction; other SIPs attract long-term capital gains tax above Rs 1.25 lakh |
Tax Benefits of SIP vs ULIP
Below is the difference between SIP and ULIP based on tax benefits:
| Tax Aspect | ULIP | SIP |
| Tax Deduction on Investment | Premiums eligible for Section 80C up to ₹1.5 lakh/year (if premium ≤10% of sum assured) | Only ELSS SIP qualifies for Section 80C deduction up to ₹1.5 lakh/year |
| Maturity/Withdrawal Tax | Short-term capital gains are taxed at 20% while long-term capital gains above ₹1.25 lakh are taxed at 12.5%. You can also get a tax-free maturity if your annual premium is less than 10x the sum assured and aggregate annual premium across all your ULIPs remains below ₹2.5 lakh. | Equity SIP: gains > ₹1.25 lakh taxed at 12.5% LTCG; short-term gains taxed at 20%; ELSS has 3-year lock-in |
| Lock-in Period | Minimum 5 years for tax-free maturity | ELSS SIP: 3-year lock-in; other SIPs are flexible |
| Capital Gains Tax | Mostly tax-free if premiums are within limits | Taxed based on holding period and fund type |
| Best for Tax Saving | Combines insurance + tax-free growth | ELSS SIP for pure tax saving and wealth creation |
ULIP vs SIP Returns: Illustrative Examples
Investing in a ULIP
You buy a ULIP with an annual premium of ₹1 lakh for 15 years. 20% of the premium is used as life cover while the remaining is invested in the market at an assumed 10% rate of return. We use a ULIP calculator to calculate your returns at the end of the policy term
| Annualised Premium | ₹1 lakh |
| Sum assured | ₹10 lakh |
| Rate of return | 10% |
| Total life cover | ₹3 lakh |
| Total investment | ₹12 lakh |
| Fund value at maturity | ₹28 lakh |
Note that the rate of return does not remain the same throughout the policy term and fluctuates as per the market.
Investing through an SIP
In the second case, you start an SIP in an equity fund. You invest ₹1 lakh annually at an assumed rate of return of 10%. You let the SIP run for 15 years. We use an SIP calculator to calculate your returns at the end of 15 years.
| Annual investment | ₹1 lakh |
| Total invested amount | ₹15 lakh |
| Rate of return | 10% |
| Fund value at redemption | ₹34.9 lakh |
Note that the rate of return does not remain the same throughout the policy term and fluctuates as per the market.
The reason why the same rate of return and time horizon provide you with different returns is that a portion of ULIP annual premium is used as life cover to protect your family financially during the policy term.
Which One Should You Choose?
The right choice depends on your existing coverage and financial objective, not on which product performs better in isolation.
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Consider a ULIP if:
- You do not have adequate life insurance coverage yet
- You want a single product for both protection and long-term wealth building
- You are comfortable with a 5-year commitment
- You prefer built-in tax-free maturity benefits
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Consider a SIP if:
- You already hold a term insurance policy for pure protection
- You want maximum flexibility and lower costs
- You are investing purely for wealth creation, not insurance
- You may need to access funds before a fixed lock-in ends
Conclusion
The comparison rarely settles on one winner because the two products are answering different questions. A ULIP makes sense for someone who wants cover and growth in a single policy and can live with the lock-in to keep the maturity amount tax-free. A SIP works better once protection is already handled and the only job left is building a corpus at the lowest possible cost. Look at what insurance you already hold, how long the money can stay untouched, and whether a five-year commitment fits your situation. Returns alone will not tell you which one belongs in your portfolio.
FAQs
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What is the main difference between ULIP and SIP?
ULIP is a product that combines life insurance and investment, while SIP is only a method of investing money in mutual funds. -
Which is better for long-term investment, ULIP or SIP?
ULIP is better for long-term goals when you also need insurance, while SIP is better if you only want to grow wealth over time. -
Does SIP provide life insurance coverage?
No, SIP does not provide any life insurance coverage and is purely an investment option. -
Is ULIP safe compared to SIP?
ULIP and SIP are both market-linked, so returns depend on market performance. ULIP also provides life insurance protection.
Insurers Offering ULIPs
Disclaimer: Policybazaar does not endorse, rate or recommend any particular insurer or
insurance product offered by an insurer.
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˜The insurers/plans mentioned are arranged in order of highest to lowest first year premium (sum of individual single premium and individual non-single premium) offered by Policybazaar’s insurer partners offering life insurance investment plans on our platform, as per ‘first year premium of life insurers as at 31.03.2025 report’ published by IRDAI. Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by any insurer. For complete list of insurers in India refer to the IRDAI website www.irdai.gov.in
*All savings are provided by the insurer as per the IRDAI approved insurance
plan.
^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.
+Returns Since Inception of LIC Growth Fund
¶Long-term capital gains (LTCG) tax (12.5%) is exempted on annual premiums up to 2.5 lacs.
++Source - Google Review Rating available on:- http://bit.ly/3J20bXZ
^^The information relating to mutual funds presented in this article is for educational purpose only and is not meant for sale. Investment is subject to market risks and the risk is borne by the investor. Please consult your financial advisor before planning your investments.