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© 2021 KlarifyLife. All rights reserved.
Disclaimer:
In this policy, the investment risk in the investment portfolio is borne by the policyholder. The Linked Insurance products do not offer any liquidity during the first five years of the contract. The policyholders will not be able to surrender/withdraw the monies invested in Linked Insurance Products completely or partially till the end of fifth year.
If you are looking to grow your money and achieve high returns, both unit linked insurance plans (ULIPs) and systematic investment plans (SIPs) are great options. However, these two have key differences, and it’s important to understand them before deciding which one to choose. Let’s explore a detailed analysis of ULIP vs. SIP concept to figure out if both are comparable or not.
What is ULIP (Unit Linked Insurance Plan)?
A unit linked insurance plan, or ULIP for short, is a type of life insurance policy that provides the dual benefits of life cover and investment. The life cover component in ULIPs can help you in securing the financial future of your family. When you pass away during the policy period, the life cover payout can help your family overcome financial difficulties that may arise after you pass away (such as loan repayment or maintaining their current lifestyle).
When you pay a premium towards your ULIP, a part of it goes for the life cover and the other part goes for investment into the financial markets. What’s interesting is that you can choose which fund to invest in, and you can also switch between funds, based on your financial goals and risk appetite. After maturity, you can get returns, depending on your investment performance, which is linked to the financial markets.
ULIPs also provide the facility of partial withdrawal; that is, you can make partial withdrawals from your investment before the maturity time but after the lock-in period.
Exploring SIP Funds
A systematic investment plan, or SIP, is a disciplined approach to investing in mutual funds. In this, investments are made at regular intervals.
What is a mutual fund? A mutual fund is a financial vehicle that collects investments from many investors and invests the accumulated funds in securities such as stocks, bonds, etc. An asset management company (AMC) handles mutual funds.
AMCs offer many mutual fund schemes that are targeted towards different investment objectives. The generated return on investment is equally distributed among the investors. Apart from SIP, one can invest in mutual funds through lump sum payments as well.
Key Differences Between ULIPs and SIP
ULIPs and SIPs can help you in achieving your long-term goals (such as buying your dream house or planning a grand wedding for your child); however, one needs to understand the key differences between them before they choose what to pick. Here are the differences:
A. Tax benefits*
ULIP:
You can get tax deductions on premiums paid for ULIPs under the Income Tax Act, 1961. You can avail tax deductions up to Rs. 1.5 lakh for the premiums you pay for your ULIP under Section 80C of the Act. If you have any health-based riders (such as the critical illness rider) added to your ULIP, you can also make use of the deductions under Section 80D of the Income Tax Act, 1961, for the premiums you pay.
Additionally, the life cover or death benefit that your family receives when you pass away during the policy period is completely tax exempt under Section 10(10D) of the Income Tax Act, 1961.
SIP:
Only ELSS (Equity Linked Savings Scheme) is eligible for tax deductions under section 80C of the Income Tax Act, 1961.
B. Return on Investment (ROI)
ULIP:
Generally, SIP has the potential of giving a higher return on investment compared to a ULIP. The premium you pay for ULIPs is divided between the life cover and investment components, so the complete premium amount is not going for investment. Further ULIPs generally have more charges than SIPs, which can impact the overall return.
SIP:
SIPs are made for investment, and hence, they have the potential to offer better returns than a ULIP.
C. Life Insurance Cover
ULIP:
ULIPs offer a life cover to protect the financial future of the family. The life cover is paid to your family if you pass away during the policy period of the ULIP. This life cover can help them overcome financial difficulties that may arise after your demise (such as loan repayment or maintaining their current lifestyle).
SIP:
SIPs don’t have any life cover attached to them.
D. Lock-in
ULIP:
ULIPs have a mandatory lock-in of 5 years, which means you cannot withdraw your investment within this timeframe. The way to think of this is, ULIP mandates you to stay invested which is required to generate returns in the long run rather than trying to time the market.
SIP:
Except for ELSS and some solution-oriented funds, there is no lock-in.
E. Risk
ULIP:
Even if your investment doesn’t perform well, you still have the life cover with you, which will be paid to your family when you pass away during the policy period. So, ULIPs generally have lower risk than SIPs.
SIP:
Your returns are purely dependent on your investment performance, so SIPs can be riskier than ULIPs.
F. Goals
ULIP:
ULIPs are suited for those who want to secure the financial future of their family and also achieve long- term financial goals (such as building their dream house).
SIP:
SIPs are for those who are purely oriented toward investing. Further, SIPs can cater to both long and short-term goals.
G. Flexibility
ULIP:
ULIPs offer you the flexibility of switching between funds and also adding riders for enhanced coverage.
SIP:
Fund switch option is not possible in mutual funds. An investor will need to liquidate the existing fund and invest the money in another fund. The liquidation may be taxed.
H. Costs
ULIP:
ULIP costs can go higher than mutual funds, and generally, there are more costs attached, one of them being mortality charges which are charges for getting a life cover
SIP:
The costs can generally be lower than ULIPs.
Advantages and Disadvantages of ULIPs
Here are some key advantages and disadvantages of ULIPs that you should be aware of:
Advantages:
1. They offer a life cover that can be used to secure your family financially and an investment component to grow your money.
2. You can choose which fund to invest in based on your risk appetite and financial goals. Further, you can switch between funds as the aforementioned factors change.
3. Risk in ULIPs is generally lesser than SIPs, as they have a life cover component with them.
4. You can get more tax benefits on ULIPs compared to SIPs.
Disadvantages:
1. Generally, the return on investment for ULIPs is less than SIP.
2. Costs in ULIPs are more than SIP.
3. ULIPs have a mandatory 5-year lock-in period.
Advantages and Disadvantages of SIP
Here are some key advantages and disadvantages of SIP that you should be aware of:
Advantages:
1. The return on investment is generally higher than ULIPs.
2. Except for a few funds, there is no lock-in period.
3. Costs are generally lower than ULIPs.
Disadvantages:
1. There is no life cover offered.
2. Generally, the risk is higher than ULIPs.
Important Factors to Consider Before Investing in ULIPs
SIPs and ULIPs are great financial tools that can help you achieve your financial goals. There’s no single answer about which one is better, as it ultimately depends on your individual needs. However, before making your choice, be sure to consider the following factors related to ULIPs:
1. Financial goals: ULIPs can cater to long-term goals but they cannot cater to short-term financial goals.
2. Tax benefits: ULIPs can offer more tax benefits than SIPs.
3. Risk: You need to understand how much risk you can take. ULIPs, due to the guaranteed life cover component, carry less risk than SIPs, whose returns are purely dependent on the investment performance.
4. Return on Investment (ROI): Typically, SIP provides higher ROI than ULIPs.
5. Costs: Generally, ULIPs have more costs associated with them than ULIPs.
Key Points to Keep in Mind When Investing in SIP
SIPs are pure investment vehicles and suit those who are looking purely for monetary returns. SIPs don’t offer any life cover to protect your family financially; furthermore, except for a few funds, they don’t have lock-in periods.
Final Thoughts
If protecting your family financially and growing your money is your goal, ULIPs may be the right pick for you, and if you’re someone who is looking to only grow your money in a disciplined way, then SIP may better suit you. Ultimately, which is better, SIP or ULIPs, depends on your personal financial objectives and risk appetite.
*Tax Disclaimer: Tax benefits & exemptions are subject to conditions of the Income Tax Act, 1961 and its provisions and tax Laws are subject to change from time to time. You are requested to seek tax advice from Chartered Accountant or personal tax advisor with respect to personal tax liabilities under the Income-Tax law
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