September 20, 2023

ULIP vs SIP

ULIP vs SIP

The biggest difference between the ULIP and SIP is that ULIP is a investment-cum-insurance scheme wherein an investor gets the dual benefit of life insurance and capital market instruments. On the other hand, SIP is one method to invest in mutual funds wherein an investor can make installment payments every week, month, quarter, or half-year.

Content: 

What is ULIP?

The full form of ULIP is Unit Linked Insurance Plan. It is a type of life insurance and investment scheme wherein you can invest a portion of the invested amount called premium towards the insurance cover and the remaining in market-linked equity and debt instruments like a mutual fund. 

You are free to choose from the type of fund, such as equity fund, debt fund, or balanced fund, as per your investment goals and risk horizon. It offers great liquidity, and you can partially withdraw the amount invested in the insurance policy. This is the best option to save a sum assured for retirement planning or securing your child’s future and meeting short-term needs.

ULIP offers a dual advantage – ensuring a guaranteed maturity amount through life insurance coverage, while also providing returns that outpace inflation through capital market investments. What’s more, both the premium and maturity amounts are eligible for tax-saving benefits under Section 80C and Section 10(10D) of the Income Tax Act, 1961, respectively, enhancing the financial efficiency of your investment.

What is SIP?

SIP (Systematic Investment Plan) is a way to invest in mutual funds in regular installments that can be paid weekly, monthly, quarterly, or half-yearly to purchase the units of a particular mutual fund. In SIP, you will get the benefits of rupee cost averaging and the power of compounding. 

In rupee cost averaging, the total cost of purchasing the units of a mutual fund will get averaged down based on the NAV fluctuations. With the power of compounding, you will be able to earn returns not just on the invested amount but also on interest earnings.

You don’t need to analyze the correct timing of the market when investing in mutual funds with SIP.  They are professionally managed by fund managers, who keep an eye on the performance of the mutual funds and will try to maximize the returns. 

You have to select from the list of mutual funds based on your preference and then give the SIP mandate to your bank linked with your Demat account to invest in them periodically, which can be weekly, monthly, etc., and the amount you wish to invest. 

The pre-decided amount will be automatically debited from your bank account, and the amount will be transferred to the mutual fund scheme. After that, you will be allotted the mutual fund’s units at the current NAV, which the fund house declares every working day at the end of the day. 

Difference between ULIP and SIP

A key distinction between Unit Linked Insurance Plans (ULIPs) and Systematic Investment Plans (SIPs) lies in their tax-saving attributes.  ULIPs allow annual tax deductions up to ₹1.5 lakhs under Section 80C. SIPs, on the other hand, are regular investments in mutual funds that offer tax benefits only when invested via ELSS mutual funds.

Here is the quick difference between ULIP and SIP:

S. No.Points of DifferenceULIPSIP
1.Purpose of SchemeLife insurance cover and capital market investment schemeMutual fund investment scheme
2.Corpus InvestedAcross equity or debt stocks or in a mix of bothType of scheme, which can be equity, debt, or hybrid funds
3.Installment PeriodThe time period selected for life cover investment Not fixed and can be changed or paused at any time 
4.Maturity PeriodFive yearsNot fixed except for three years for ELSS funds
5.Tax SavingsOn premium amount, maturity amount, switching payments, top-up payments, and death benefitsOnly on the invested amount in the ELSS funds
6.Partial WithdrawalsYes, with certain limitationsCan be withdrawn at any time
7.Premature Withdrawals Not possiblePossible except for ELSS funds
8.Loyalty BenefitsYesNo 
9.Change in AmountYesYes
10.Change in SchemeYesYes
11.Charges Applicable1.35%2.50%
12.Regulatory AuthorityIRDAISEBI
13.Risk LevelModerateHigh
14.Death BenefitYesNo
15.ReturnsSum assured or market-linked returnsOnly market-linked returns
16.Ideal For Insurance cover, market returns, and tax savingsMarket returns

ULIP vs SIP – Which is better?

Purpose of Scheme

The ULIP scheme serves the purpose of being an investment scheme and provides life insurance coverage. SIP is one method to invest in mutual funds that provides installment payment benefits. 

Corpus Invested

In ULIP, the money collected from multiple investors is invested into different instruments, such as equity, debt, hybrid, etc., by the professional fund manager and in the life insurance. In SIP, the money collected from multiple investors is invested only in one type of mutual fund.

Installment Period

ULIPs have an installment period equal to the period selected for the life insurance coverage or can be less than that, which can range from five to seven years. SIPs do not have any fixed installment period and can be redeemed or paused at any time.

Maturity Period

The maturity period of ULIP is five years from the date of the commencement, and you cannot redeem your investment before that period. There is no fixed maturity period or lock-in period in SIPs, as you can redeem your investment anytime if it is an open-ended mutual fund scheme. 

Tax Savings

In ULIPs, the premium amount is tax deductible up to ₹1.5 lakhs under Section 80C of the Income Tax Act, 1961. Maturity amount and death benefits are tax-free under Section 10(10D) of the Income Tax Act,1961. You can also save on taxes on partial withdrawals and top-up amounts. In SIPs, there are no such tax savings benefits except in the case of ELSS funds which provide tax savings on the invested amount. 

Partial Withdrawals

ULIP has an option of partial withdrawal after the five-year lock-in period ends and you have paid all the premiums. SIP can be withdrawn anytime at the current NAV with just one click. 

Premature Withdrawals 

In ULIP, if the five-year lock-in period is not over, then you can’t withdraw the amount even if you choose to surrender the policy or not pay the premium. In SIP, you do not face such restrictions and can redeem your mutual fund investment anytime. 

Loyalty Benefits

ULIPs offer loyalty benefits if the policy is maintained for a minimum of five years, presenting investors with two options for these benefits: a percentage of the Net Asset Value (NAV) or a percentage of the premium amount paid. In contrast, SIPs, while offering market-linked returns, do not provide any loyalty benefits. 

Change in Amount

ULIP provides the flexibility to change the premium amount, and you can increase the premium amount by choosing the top-up option. SIPs come with a top-up facility where you can increase the installment amount anytime. You can stop the installment payment and change the period or date. 

Change in Scheme

In ULIP, you can switch between various schemes such as equity, debt, and balanced funds. In SIP, you can choose the STP (Systematic Transfer Plan) to change the investment amount from one mutual fund scheme to another by giving a mandate to the fund house.

Charges Applicable

ULIP has different types of charges such as premium allocation charges, switching funds charges, fund management charges, etc. and the fund management charges cannot exceed more than 1.35% of the fund value as decided by IRDAI. In SIP, you have to pay only the expense ratio, which includes all the charges incurred by an AMC to manage the mutual funds.

Regulatory Authority

ULIP is regulated by the Insurance Regulatory and Development Authority (IRDAI). They are the ones who set the lock-in period, the minimum sum assured amount, and the working of insurance companies who provide this scheme. SIP is a type of investment mode, and the mutual funds are regulated by the Securities and Exchange Board of India (SEBI). 

Risk Level

ULIPs offer a comparatively lower level of risk as they combine insurance coverage with investment opportunities. They provide the assurance of earning the sum assured upon policy maturity or in the event of the insured’s unfortunate demise. On the other hand, SIPs involve a higher level of risk due to the fluctuating nature of the underlying instruments in which mutual funds invest. 

Death Benefit

ULIP provides the death benefit to the nominee or dependents of the insured. Type I ULIP provides the death benefit based on the fund value or on the sum assured, whichever is higher. Type II ULIP provides both the sum assured and fund value as the death benefit to the nominee. There is no such death benefit that a SIP provides. However, if the investor has appointed a nominee when investing in a mutual fund, then the nominee will get the invested amount and return at the prevailing NAV. 

Returns

ULIP can provide an average return of 12% to 15% if you remain invested for at least ten years. However, the returns are closely linked to the market, but definitely, some fixed sum is assured to the life cover. SIPs do not provide any guaranteed sum assured, and the returns are totally market-linked which are based on the type of mutual fund scheme chosen. 

Ideal For 

ULIPs are ideal for investors looking to invest in tax-saving instruments, want a life insurance cover, and someone who has long-term investment goals for a minimum of 5 years period. SIPs are best for investors looking to invest in mutual funds in regular installments and have short-term to long-term investment goals.

Do you want to expand your knowledge about mutual funds? We’ve got a list of must-read blogs that will help you do just that. Just click on the articles to find out more.

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ULIP vs SIP – Quick Summary

  • The key difference between ULIP and SIP is that ULIP provides both insurance and capital market investment while SIP is a method of mutual funds investment. 
  • ULIP is an investment scheme that provides tax-saving benefits, life insurance cover, and market-linked returns on market investments.
  • SIP is an investment mode wherein one can invest in mutual funds in installments made weekly, monthly, or quarterly. 
  • ULIP provides tax savings on the premium, maturity, death benefits, etc. On the other hand, SIP investment in ELSS provides tax savings only on the invested amount. 
  • ULIP provides death benefits to the nominee or dependents of the insured, while SIP does not provide such benefits. 

Difference Between Ulip And SIP – Frequently Asked Questions

1. What is the difference between ULIP And SIP?

The main difference between ULIP and SIP is that in ULIP, the money collected is invested into different instruments, and some in life insurance, whereas in SIP, the money collected is invested only in one type of selected mutual fund.

2. Is ULIP better than a mutual fund?

Yes, ULIP can be better than a mutual fund because they provide the additional benefits to cover yourself from a life insurance policy which is not there in the mutual fund. 

3. Do ULIPs give good returns?

ULIPs can give good returns but totally depend on the type of instrument the money is invested in. 

4. Is ULIP tax-free?

ULIP is tax-free on the premium amount, maturity benefits, death benefits, partial withdrawals, top-up payments, and switching payments.

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