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ULIP or SIP

Investing can help grow your money and build wealth for the future. Two popular options are ULIPs and SIPs. ULIPs combine life insurance with investment, while SIPs allow regular, small investments in mutual funds. This article compares these two methods to help you choose the best fit for your financial goals and risk tolerance. ...Read More

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ULIP or SIP – Which Is a Better Investment Option?

Which Is a Better Investment Option
July 19, 2024

Table of Content

 


In this policy, the investment risks in the investment portfolio is borne by the policyholder

Investing is the most effective way of growing your money in a better way to create wealth for your future. However, choosing the correct investment according to your risk tolerance and financial needs is crucial. In this blog, we will go through a detailed comparison of ULIP vs SIP to decide which one is better for your investment journey.

What Is ULIP?

ULIP or Unit Linked Insurance Plan is a combination of life insurance and investment. A small portion of your investment is used to pay the premiums of your insurance plan and the other portion is invested in the market. Being a policyholder, you can pay premiums annually, quarterly (₹ 3000), half-yearly or on a monthly basis.

The policyholder gets the flexibility to allocate their investment in a fund of their choice based on their risk tolerance and financial goals.

What Is SIP?

A Systematic Investment Plan or SIP is a disciplined way of investing your money in a mutual fund. You can systematically invest your money by paying your SIP every month. SIP is the option to pay a small amount every month for a long duration to grow your wealth in the long term.

In SIP, the predetermined amount is automatically deducted from your account and by purchasing in regular intervals you can get the benefit of ‘Rupee Cost Averaging’. This means when the NAV is low, you will get more units of mutual funds and you will get fewer units when the prices are high. In the long term, this helps you to reduce the impact of market volatility on your wealth.

Differences between ULIP and SIP

Here are some most important differences between these two financial products ULIP or SIP:

Points

ULIP (Unit Linked Insurance Plan)

SIP (Systematic Investment Plan)

Type

Insurance+investment

Only investment

Mix

Money is invested in debt and equity market

The accumulated funds are invested in the market

Tax Benefit

Tax benefits can be claimed under Sections 80C and 10(10D) of the Income Tax Act1

Tax benefits can be claimed only if you invest in an Equity Linked Savings Scheme (ELSS) up to the maximum limit of Rs.1.5 lakh. 

Switching Option

Free switches between different funds are available but limited number in a year

You can only switch between funds of the same AMC. Exit load and expense ratio is applicable. 

Life Cover

ULIP plan gives life cover to your family 

SIPs do not have the benefit of life cover

Death Benefit

In case of the unfortunate death of the policyholder, the beneficiary gets the death benefit offered

No death benefit is offered in SIP investments

Investment Regulated By

IRDAI

SEBI

Fund Management Charges

1.35%

2.50%

Lock-in Period

5 years

None for most funds (3 years for ELSS only)

How to Calculate the Returns on Your Investments in ULIPs and SIPs?

To calculate the returns on your SIP investments, you can use a SIP calculator. This will help you to make an informed decision by calculating the expected return on your investments.

Enter your age, investment amount, payment interval, duration and your expected returns per year. After you click on the submit button, you can get a detailed calculation based on your inputs.

To calculate returns from a ULIP investment, you can use a ULIP calculator. Enter your age, investment frequency, amount and maturity period to get the results.

What Is the Difference Based on Tax Benefits?

Follow this table, to know the differences between ULIP (Unit Linked Insurance Plan) and SIP (Systematic Investment Plan) based on their tax benefits:

Points

ULIP (Unit Linked Insurance Plan)

SIP (Systematic Investment Plan)

Taxation Rules

Death benefits from a ULIP are entirely tax-exempt. For returns from ULIP investments, they are taxable if your annual premium for ULIPs exceeds Rs. 2.5 lakh. The taxation rules depend on the unit composition. 

Returns from mutual fund investments made via SIP are chargeable to capital gains tax. Equity and non-equity funds are taxed differently. 

Tax Benefits

The policyholder can enjoy the tax benefits on the paid premium and maturity under Section 10(10D) and 80C of the Income Tax Act1, up to a maximum limit of Rs. 1.5 lakh.

You cannot get tax benefits on any mutual fund SIP investment. Only if you invest in Equity-linked savings schemes (ELSS), you can avail a maximum tax deduction of Rs. 1.5 lakh under Section 80C1.

Factors to Consider before Choosing between ULIP and SIP

The major difference is that ULIP offers you life insurance coverage, whereas SIP investments do not have the opportunity of insurance protection. However, SIP is one of the best ways of investing your money in mutual funds to create your wealth by investing a small amount in a fixed interval.

Before deciding between ULIP (Unit Linked Insurance Plan) and SIP (Systematic Investment Plan), you must consider the following points:

  • Risk Profile:

    If you understand the points about ULIP or SIP, you should know your risk tolerance or risk profile. The risk of both a ULIP and SIP plan depends on the funds they invest in. Typically, mutual funds carry lower risks. However, ULIP can give more returns due to their insurance component.

  • Flexibility:

    SIP is more flexible in terms of the investment amount, intervals, and discontinuation. Whereas ULIPs are more flexible in terms of fund switching between debt, equity or hybrid funds depending on market conditions and risk tolerance.

  • Objective:

    The main objective of SIP is only to invest money and wealth creation. However, the ULIP helps you to invest your money as well as gives you life insurance protection.

  • Returns:

    ULIPs can provide higher returns than SIPs. However, the returns are not guaranteed2 at the time of maturity. On the other hand, an SIP is more stable and better for long-term wealth creation.

  • Coverage:

    ULIP is a mix of insurance and investment where you can enjoy life insurance coverage. In case of the unfortunate death of the policyholder, the beneficiary will get the sum assured amount. However, there is no such option for SIP investments. If the investor dies, the amount invested will remain the same and the nominee will make further decisions. This is one of the most important points about ULIP vs SIP.

ULIP or SIP- Which Is Better?

ULIP is a good investment option if you are looking for a combination of investments and insurance protection. With it, you can get additional benefits like rewards, tax advantages, simple switching options and loyalty bonuses.

On the other hand, with SIP, you can focus on wealth creation by investing your money in a disciplined way. Also, mutual fund houses offer you no lock-in period for these investments. It also offers benefits like lower costs, better performance, more choices, etc.

So by considering the above points, you have to decide on investing your money in a particular investment product.

At the end of this blog, you have a clear idea about the topic of ULIP vs SIP. Read all scheme-related documents carefully before investing in any type of financial product. Assess your risk, set your goal and make your final decision.

FAQs on ULIP vs SIP

Q1: What are the differences between ULIP And SIP?

ULIP is a financial product where you can enjoy various benefits of both investments and insurance. Where SIP is only for investment purposes. This is the basic difference between ULIP and SIP.

Q2: Which is better- SIP or ULIP?

The decision is up to the investor or the buyer making this decision. If you want to make a disciplined investment with the benefits of lower costs, better performance, and more fund options, you can opt for SIP. On the other hand, if you are interested in rewards, tax advantages, simple switching options and loyalty bonuses along with life insurance cover, you may choose a ULIP plan.

Q3: Do ULIPs give high returns?

Yes. ULIPs provide high returns along with insurance benefits if you choose the equity option. However, the returns are not guaranteed2.

Q4: How can I calculate my ULIP returns?

You can calculate your ULIP returns easily by calculating the difference between the current NAV and the invested NAV value. This is one of the easiest ways to track your returns regularly.

Q5: Is ULIP better than SIP?

If your goal is only to invest money, ULIP may not be a better option. But if you want to get insurance and investment benefits in a single financial product, it is better to purchase a ULIP plan instead of investing via an SIP.

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal Vishal Subharwal

Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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Here's all you should know about ULIP insurance.

We help you to make informed insurance decisions for a lifetime.

ULIP or SIP – Which Is a Better Investment Option?

ULIP or SIP – Which Is a Better Investment Option?

ULIP vs SIP - Know the difference between ULIP and SIP. Explore the features, benefits, drawbacks, and returns to make a well-informed decision for a prosperous financial future.

Understanding ULIP Charges and Fees: A Beginner's Guide

ULIPs or Mutual Funds: Where to invest?

ULIP Taxation: What Is The Taxability of ULIP On Maturity?

ULIP Taxation on Maturity: Explore tax benefits and regulations under Section 80C and 10(10D) of the Income Tax Act, 1961 for ULIPs. Make informed decisions for financial growth.

ULIP Taxation: What Is The Taxability of ULIP On Maturity?
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Disclaimer

  1. Tax benefits are subject to conditions under Sections 80C, 80D, Section 10(10D) and other provisions of the Income Tax Act, 1961.

  2. Provided all due premiums have been paid and the policy is in force.

Note - This material has been prepared for information purposes only, should not be relied on for investment, tax or any accounting advice. It is requested to seek advice of your financial advisor with respect to any investment or financial decision. 

The Unit 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 Unit Linked Insurance Products completely or partially till the end of fifth year.

Unit Linked Life Insurance products are different from the traditional insurance products and are subject to the risk factors. The premium paid in Unit Linked Life Insurance policies are subject to investment risks associated with capital markets and the NAVs of the units may go up or down based on the performance of fund and factors influencing the capital market and the insured is responsible for his/her decisions. 

The name of the company, name of the brand and name of the contract does not in any way indicate the quality of the contract, its future prospects or returns. Please know the associated risks and the applicable charges, from your insurance agent or the intermediary or policy document of the insurer. The various funds offered under this contract are the names of the funds and do not  in any way indicate the quality of these plans, their future prospects and returns.

18. Save 46,800 on taxes if the insurance premium amount is Rs.1.5 lakh per annum and you are a Regular Individual, Fall under 30% income tax slab having taxable income less than Rs. 50 lakh and Opt for Old tax regime.

** The past 5 year fund performance of HDFC Life Discovery Fund (SFIN: ULIF06618/01/18DiscvryFnd101) as on 30th November 2024. The benchmark taken into consideration here is is Nifty Mid Cap 100 which as a return of 26.77% as on 30th November 2024. HDFC Life Discovery Fund is available with HDFC Life ULIPs which comes with a life cover. Please note past fund performance is not indicative of future performance.

ARN - ED/06/24/12278

 

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