ULIPs vs. SIPs – Know the Difference

Unit-Linked Insurance Plans (ULIPs) and Systematic Investment Plans (SIPs) are both popular investment instruments in India. This is why many investors find it challenging to decide which option is right for them. Here, we explain how these plans work and their differences to guide you to choose between them.

What are ULIPs?

A ULIP is a life insurance policy that offers the additional benefit of wealth creation. You can purchase ULIPs by paying regular premiums. They invest it in equity, debt, or a combination of funds as per your requirements to generate returns. Consider allocating your money in equity funds if you are willing to take the risk to earn high returns. If you wish to earn moderate returns at lowrisk, you can invest the money in debt funds.

As you now understand what is ULIP plan, read on to learn how an SIP works.

What are SIPs?

SIPs are an ideal investment avenue for people who want to put their money in a mutual fund regularly. With an SIP, you can decide how much money you want to invest in a mutual fund and the duration between each installment. You can pick from yearly, quarterly, and monthly SIPs as per your comfort. With SIPs, you can start investing with a sum as low as INR 500.

Here are a few points of comparison between ULIP and SIP to help you determine which instrument is more suitable.

  1. Benefits

If you are wondering “why should I invest in ULIP“, the most straightforward answer is that it provides the dual benefits of life insurance policy and market-linked investment. By investing in ULIP, you ensure that your family remains financially stable in your absence. Moreover, you build a substantial corpus in the long run.

In contrast, an SIP is a pure investment option. With an SIP, you can make regular investments in a mutual fund of your choice and generate long-term returns.

  1. Tax benefits

Section 80C of the Income Tax Act, 1961 allows you a yearly taxexemption of up to INR 1.5 lakh on the premium paid for a ULIP. Additionally, the maturity benefits of ULIP are tax-free under Section 10 (10D) of the Act.Please note that for policies issued after 1 February 2021, in case the aggregate premium in a financial year exceeds INR 2.5 lakhs, the maturity proceeds from such policy would be taxed as capital asset as per the recent Finance Bill. However, the tax exemption under Section 10(10D) would continue for policies with annual premium less than Rs.2.5 lakhs in aggregate subject to provisions stated therein.

Generally, SIPs do not provide any tax relief. However, if you invest in an Equity-Linked Savings Scheme (ELSS)mutual fund, you can availof a maximum annual tax deduction of INR 1.5 lakh according to Section 80C of the Income Tax Act, 1961.

  1. Investment alternatives and returns

When you put your money in ULIPs, you can decide whether to invest in equity or debt funds. Your return depends on your choice of fund.

In SIPs, the money is majorly invested in the equity market.

The ULIP performance depends on the kind of fund you invest in, whereas the returns of SIPs are dependent on the financial market’s condition.

  1. Charges

The Insurance Regulatory and Development Authority of India (IRDAI) mandates that ULIP’s fund management fee cannot be over 1.35%. In contrast, SIPs levy a 2.5% fund management fee. However, ULIPs have a few other associated charges, such as mortality fee, premium allocation fee, administration fee, and others.

  1. Switching

The fund-switching option is a significant difference between ULIPs and SIPs. When purchasing a ULIP, you have the convenience to choose among different equity, debt, and a mixture of fundsfor investment. ULIPs let you move your investments from one fund to another as per your changing needs and risk appetite. With timely switches, you can control the ULIP performance to some degree. SIPs do not have any such facility, resulting in less flexible investment options.

Now that you understand what is ULIP plan and how it scores over SIPs, it is time to find the right policy. You can do so by comparing different ULIPs online in terms of their pricing, benefits, and potential returns.

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