ULIP vs SIP

ULIP vs. SIP, this is the most common dilemma that investors face these days. Every now and then the question that most of the investors ask- should they go with a Systematic Investment Plan or a Unit linked insurance plan– which one is better? To conclude to an answer here is a simple guide to help you understand should you go for ULIPs or SIPs?

What is ULIP?

ULIP full form is Unit Linked insurance plan. Ulip plans are unique as they offer the benefits of both investment and insurance in a single plan. By investing in a ULIP plan you get insurance cover and also the opportunity to invest across the stocks and the bonds. Basically, it gives you the opportunity to earn market-linked returns and simultaneously takes care of your insurance protection needs.

In addition to long-term wealth creation, Ulips also make a great way to inculcate investment discipline. You can enjoy good returns and use the amount invested to meet your long-term financial goals.

What is SIP?

The full form of SIP is Systematic Investment Plan. In SIPs you invest a chosen amount is invested in mutual funds at regular intervals of time. You can choose to start a monthly, quarterly or yearly SIP. In other words, SIP Investments help you build a huge corpus over the time and you can start with an amount as small as Rs.500.  

*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C Apply

The Difference Between ULIP and SIP

To be a successful investor there are two important points that should be considered. Firstly, an individual must identify the investment instrument that earns quick and safe returns. Secondly, they must invest a part of their income regularly to meet the short and long-term financial goals.

Unit Linked Insurance Plan (ULIP) and Systematic Investment Plan (SIP) are two such investment options that can help the investors to achieve their long and short-term financial goals. However, there is always a fight that, which is a better investment instrument. Should the individuals invest in the top ULIP policies or they should compare and purchase the best SIP plans?

So, in order to make it easy for our readers, here we have briefly discussed the major point of difference between ULIP and SIP plan. Thus, simply take a few minutes and skim through this page to know which is a better investment option-ULIP or SIP.

Disclaimer: Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by an insure

Parameters

ULIP

SIP

Instrument Type

Offers the combined benefit of  life insurance plus investment

Offers the benefit of only investment

Investment Mix

In ULIP plans the funds can be invested in equity and debt market

In SIP, the funds are majorly invested in the equity market

Tax Benefit

Tax Benefit can be availed on the premium paid towards the policy and maturity proceeds under Section 80C and 10(10D) of Income Tax Act

Tax exemptions are applicable only on the Equity Linked Savings Scheme (ELSS) up to the maximum limit of Rs.1.5 lakh.

 

Life Cover

As an investment cum insurance product, ULIP plan offers life cover to the family of the insured

As a pure investment option, SIP does not offer the benefit of life cover.

Switching Option

Free switches between funds are applicable up to a limited number in a year in ULIP plans.

The investors can make free switches between funds.

Death Benefit

The death benefit is paid to the beneficiary of the policy in the event of the unfortunate demise of the insured person

No death benefit is paid to the investors in SIP.

Investment Regulated By

IRDAI

SEBI

Lock-in Period

5 years

3 years

Fund Management Charges

1.35%

2.50%

Here is an illustration: 

Mr. X invests Rs. 1 lakh in a ULIP plan, while Mr. Y buys mutual fund units of the same amount. The money is invested for both Mr. X and Mr. Y. So, every month a portion of Mr. X’s investment is towards life insurance cover as the insurance premium. He gets an insurance cover of Rs. 10 lacs.

Whereas, Mr. Y would need to purchase a separate life insurance policy for life cover. And if Mr. X meets with an accidental death or untimely demise, the insurer will recompense his family members with a sum of Rs. 10 lakhs or the fund value, whichever is higher. However, this is not the case for Mr. Y.

Now that you know that these are the point of difference between ULIP & SIP, let’s understand these points in more detail.

In Terms of Benefits

The major difference in terms of benefits between ULIP and SIP plans is that ULIPs are an insurance product that also works as a capital growth investment instrument. In fact ULIP offers a combined benefit of insurance cum investment. In the ULIP plan, a part of the premium is paid towards the policy for insurance coverage, whereas the other half of premium is invested in market-linked securities with an objective to gain profitable returns on investment.

On the other hand, SIP is a pure investment instrument where a predetermined amount of money is invested per month in mutual fund schemes with an objective to create capital growth and long-term investment returns.

In Terms of Tax-Benefits

Normally, SIP does not offer the benefit of tax exemptions to the investors. However, only equity-linked savings schemes (ELSS) offered by mutual fund provides tax exemptions to the investors up to the maximum limit of Rs.1.5 lakh U/S 80C of the Income Tax Act. On contrary to this, in ULIP plans, the policyholder can avail tax benefit on the premium paid towards the policy up to a maximum limit of Rs.1.5 lakh and maturity proceeds under Section 80C and 10(10D) of the Income Tax Act.

In Terms of Returns

Returns, in both the investment option, entirely depend on the market performance of the fund. Returns in a ULIP plan depends on whether the investor is investing in an equity fund, debt fund, or hybrid fund. Whereas, in SIP this factor can be easily determined. ULIP is considered a more lucrative option of investment for investors who are looking for a safe investment option and who have a medium to low-risk appetite. Moreover, in ULIP plans the fund managers usually invest in low-risk fund options to ensure that the money invested is safe.

In Terms of Charges

As per the rules of IRDA 1.35% of fund management charge is applicable to ULIP plans. Apart from this, there are other charges which are also applicable to the ULIP plan like premium allocation charge, mortality charge, administration charge, etc. On the other hand in SIP 2.5% of the fund management charge is applicable.

In terms of the Lock-in period and Risk

As both the investment options are market-linked, it carries significant risk. In terms of return on investment, it is best to invest in ULIP or SIP in for a long-term keeping long-term capital returns in mind. ULIP plans come with a  lock-in period of 5 years, whereas the SIP plan offers a lock-in period of 3 years. 

In Terms of Death Benefit

This perk is only offered in the ULIP plan. Since ULIP is an insurance product death benefit is offered to the beneficiary of the policy in case of an unfortunate demise of the insured person during the tenure of the policy. On the other hand, as SIP is a pure investment product no death benefit is offered to the investors.

In Term of Switching Option

This is another point of difference between ULIP and SIP Plans. In ULIP plans free switching options between funds are offered to the investors making it more flexible. In ULIP, the investors can choose to invest in debt or equity funds or both. Whereas SIP does not offer this benefit of fund switching, and the investors are not allowed to switch funds for the duration of their investment.

Factors to Consider Before Deciding Between Ulips and SIPs:

When deciding between Ulips and SIPs you need to consider the benefits offered, risk appetite etc. Below are some of the factors that can help you select between SIPs and ULIPs:

Dual Benefits of Insurance and Investment

One of the major differences between SIPs and ULIPs is that SIPs do not offer life cove while ULIPs do so. Just like mutual funds a portion of your ULIP investments are directed towards an investment pool. The insurer gathers the money from all the investors towards various funds in order to generate higher returns. And the rest of the premium is used for life insurance cover.

Risk Factor

The fact that SIPs are pure investment products makes them a risky investment but you get higher returns from the compounding benefit. The Key is to stay invested for a long-term. On the other hand the risk involved in ULIPs is partial because of the insurance quotient. The fund managers divert your investment towards lower risk funds to reduce the negative impact on your invested amount.

Fund management charges

The fund management charges for SIPs are nearly 2.5% higher than ULIPs. Additionally, there are a couple of other charges like entry and exit load and other recurring charges. On the contrary, ULIPs have lower fund management charges of 1.35%.

SIPs and ULIPs may appear similar upfront but their asset allocation is different. The charges differ as both of them are structured in a different way. SIP in mutual funds only charges fee for money management and an exit fee as penalty for selling units soon after your investment date.

ULIPs, in contrast, levy charged under different heads such as premium allocation charges, administration charges, and fund management charges. And a portion of your investments in ULIP include the insurance premium, it is called as the mortality charges.

Tax-saving Benefits

If you are considering ulip vs. sip which is better from investment perspective then do not forget that only ELSS i.e. Equity Linked Saving Scheme in mutual fund provide tax-saving benefits. In case of ULIPs, any amount up to Rs. 1.5 lakh can offer you tax saving benefits under Section 80C of the Income Tax Act.  

*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C Apply

So which one should you invest in?

If you are stuck in Ulips vs. SIPs then before investing in any of these two, you need to consider some of the factors that are listed below:

  • Do you need life insurance cover?
  • Your investment horizon
  • Your risk appetite
  • Your financial goals
  • Do you want to save for unforeseen expenses or for retirement?

ULIPs make a suitable investment option for individuals looking for long-term wealth creation and insurance cover. The maturity amount can be used for children’s education, marriage, retirement, and other financial goals. Under a single plan, you get dual benefits of insurance protection and savings.

Individuals who are not know much about the equity market or mutual fund options and are looking for long-term capital appreciation with equity investments. And SIPS make a perfect investment option for those who do not want to time the market and have a long-term investment horizon.

Wrapping it Up!

For any investors, it is very much possible that they have a fixed budget to invest. Therefore, it makes total sense to carefully figure out the best investment option and make an investment with an objective to reap the highest possible returns. If you want to invest in SIP or ULIP, then make sure that you consider these differences and choose the best investment option as per your financial goals, risk appetite, and tenure.

Updated: 14 September 2020
Written by Vivek Jain
Author | 2 Posts

Vivek Jain, Head of Investments at Policybazaar, has an experience of 8+ years. A post graduate diploma in Computer Management from IIM Calcutta, he in his current role, has been instrumental in driving product innovation in Savings/Investments. He is one of the calmest members of the team with a hidden talent for whistling. Yes, he can whistle a mean tune and is really proud of it!

Disclaimer: Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by an insurer.
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