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Difference Between ULIP And SIP

dateKnowledge Centre Team dateApril 08, 2021 views212 Views
Difference Between ULIP And SIP

When you think of investments and savings, you start exploring various plans that offers you various benefits for saving your money. Some of the best savings and investment options also include life insurance plans. However, as you go deeper with your financial research, you might get confused between ULIPs (Unit Linked Insurance Plans) and the SIP (Systematic Investment Plans).

If you are someone who has not heard of these terms yet, then don't worry. We will discuss the difference between the two, covering the very basics to make it easier for you. With this knowledge, a new investor and someone who has done basic research about financial investments can find themselves at ease.

Now first things first, let's take a look at what exactly ULIP and SIP mean.

Unit Linked Insurance Plans (ULIPs)

Unit Linked Insurance Plans or ULIPs are one of its kind financial investment tools. ULIPs provide the benefits of both insurance and investment when you invest in them. While providing you with a cover with the insurance plan, ULIP allows you to invest in bonds and stocks.

This way, returns from ULIPs are market-linked with the security of an insurance cover. Apart from wealth-creation, you can develop an investment discipline with ULIPs. For long-term financial goals, ULIPs for savings are a good option.

Systematic Investment Plan (SIP)

A Systematic Investment Plan or SIP, as the name suggests, is a systematic way to channelize your investment. Through SIP, you invest on a monthly, quarterly, or yearly basis in mutual funds. SIP is a long-term investment tool with a planned approach. You can have wealth creation over a certain period.

With SIP, you should have a long-term financial or life goal for which you can plan the savings. The benefit of SIP is that you can start your investment with as low as Rs 500. So, even if you are a student or someone who has just started earning, SIP is an option.

ULIP vs SIP: How the two investment tools differ?

Having discussed the basics of both ULIP and SIP, it is time to take a look at their differences.

Parameter ULIP SIP
Policy Type Benefits of both life insurance and investment. Only investment benefits.
Only investment benefits. 5 Years 3 Years (for Equity Linked Savings Scheme (ELSS) mutual fund)
Tax Benefits Tax-related benefits can be availed on the premium paid towards the policy and maturity proceeds under Section 80C and 10(10D) of the Income Tax Act. Tax benefits are not applicable in SIP. However, exemptions are applicable only on the Equity Linked Savings Scheme (ELSS) up to the maximum limit of Rs.1.5 lakh.
Withdrawal Options Partial withdrawals after the lock-in period are over. Invested capital can be withdrawn; However, for ELSS, withdrawals can be made after a lock-in period of 3 years.
Flexibility Flexibility in terms of deciding what portion would go for life insurance cover and what would go for investment. Flexibility in terms of increasing or decreasing the invested capital for long-term gain.
Liquidity No liquidity till the completion of the lock-in period. Full liquidity on the amount of capital invested.
Additional Benefits Loyalty benefits along with the issuance of additional fund units after the completion of the lock-in period. There are no such additional benefits.
Death Benefits Benefits paid to the beneficiary in case of the unfortunate demise of the insured person. No death benefits are available.
Fund Management Charges 1.35% 2.50%
Switching Option Free switching options between funds (up to a limited number) in a year. Freedom to make switches between the funds.
Regulator IRDAI SEBI

Factors to consider before deciding between ULIP and SIP

While choosing between ULIP and SIP, one major thing that you have to consider is your financial plan. If you have a long-term financial goal where you need a planned approach, then SIP comes as a logical option. However, if you are also looking for an insurance cover alongside your investment, then ULIPs are the best option. Before making a call between the two, you must check the parameters based on which we made the comparison above.

ULIPs for planning your retirement

While we have made a detailed comparison, the importance of a particular parameter varies from person to person. That is to say; for example, a given investor pays more heed to switch options or lock-in period while choosing between the ULIP and SIP. On the other hand, for some users, death and additional benefits can be major criteria.

Which one to invest in?

After looking at the comparison between SIP and ULIP, the next logical step is to determine which one to invest in. Simply put, the choice depends on your financial goals and plans. However, taking a look technically and in terms of financial management, ULIPs are a nice option. The reason for it in simple terms is very clear. You get a life insurance cover as a first thing. Further, there is an option to earn market-linked returns. With SIP, you don't get dual benefits.

Thus, the crux is that, with ULIPs, you don't have to buy two financial products separately for insurance and investment. However, if you are not thinking of insurance much or are okay with buying two separate financial products, then SIP is also a good option. Another benefit of SIP is that it's a new investor's go-to tool as you can start with a bare minimum amount as well.

Which ULIP to invest in?

Well, there are several ULIPs offered by service providers. The recently launched Canara HSBC Oriental Bank of Commerce Life Insurance - Invest 4G is a good ULIP option if you are planning investment. The best thing with this ULIP is that you can customize it as per your goals. This offers great flexibility and freedom in terms of management of your investment with an eye on the future. Thus, it is a good option if you have zeroed on ULIP.

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In order to understand ULIP NAV, you first need to understand how ULIPs work. In ULIPs, a portion of premium from different investors is accumulated to create one investment corpus. This money is invested in several different market instruments. So to divide the returns properly among all the investors, the fund manager divides the net asset value in to small units with a specific face value. NAV is the per market share value of a fund. To better understand the definition of NAV, take a look at the formula below -

Net Asset Value = [Assets-(Liabilities + Expenses)] / Outstanding Units

It's not risky to invest in ULIP if you chose a safer path. Risk factor in ULIPs depends on the investment option you choose. If you are not okay with sharp movements, then choosing a low risk investment is a better idea. For people with high risk appetite, it's good to choose equity funds while risk-averse investors can go for debt funds.

You can opt for settlement option if you want to take your fund value in periodic installments. With the settlement option, you can get your maturity amount in installment as per the frequency chosen by you over a maximum period of 5 years. You can choose complete withdrawal of fund value at any point of time. Although, you will not get any life cover during this period.

ULIPs are life insurance products that provide paths to invest. And just like other investment option, there's no guaranteed investment return in a ULIP. Although, if you like taking risks and want to earn more returns on your investment, then opt for equity funds.

At the time of maturity of ULIP policy, you will get the fund value on your prevailing NAV. Fund value is the number of units of policy multiplied by NAV (net asset value).

Value of the fund = Total units of policy x NAV (Net Asset Value)

Well, discontinuing your premium payment will disrupt your savings as well as financial goals. In such case, you can approach your insurance company and ask for the revival of discontinued policy within the stipulated timelines. Also, you will have to pay all the unpaid premiums.

ULIP plan is a combination of investment and insurance. Thus, one must hold this plan for a duration of at least 10 years so as to get investment benefits out of it. As an early exit will have its own consequences. ULIPs have a lock-in-period of 5 years. Thus, you may surrender your policy before the completion of 5 years, but you will be paid only after the end of 5 years.

Generally, minimum lock-in period for ULIP is 5 consecutive policy years. During this time period, if the policyholder discontinues or surrenders the policy, then he/she will not able to receive any payouts. Withdrawals are only allowed at the end of the lock-in period. In addition to this, if you surrender your policy before the lock-in period ends, then you will have to pay surrender charges as well. Also, it is advisable not to exit your plan after the completion of 5 years of lock-in period, because if you stay invested for a longer duration it will help you reap better benefits.

The amount that you pay towards the Unit Linked Insurance Policy is eligible for tax deduction as per Section 80C of the Income Tax Act, 1961. This means that the premium amount paid will be deducted under section 80C from your taxable income up to a maximum limit, which is currently ₹1.5 Lakhs. However, the aggregate amount of deductions under section 80C, section 80CCC and 80CCD (1) shall not, in any case, exceed ₹1.5 Lakhs. Also, upon the maturity of the policy, the payout amount you receive will be exempt from income tax, subject to the applicable provisions of Section 10(10D) of the Income Tax Act, 1961.

Here’re the following major benefits of buying ULIP

1. Tax Benefits – It helps you to reduce tax liabilities. This means you are liable to enjoy tax benefits on the premiums paid towards the policy as per Section 80C of the Income Tax Act.

2. Long-term growth– One of the major benefits of buying a ULIP plan is that it offers long-term benefits. ULIPs come with a lock-in period of 5 years which will keep you invested for a longer period.

3. Dual benefits – ULIPs not only offer life coverage but also come with a wide range of investment funds that will help you earn great returns. This includes balanced funds, debt funds or equity funds. You can invest in any of them depending on your need and risk appetite.

4. Flexibility – It gives you the flexibility to switch between funds basis your risk appetite. You could select multiple funds and different investment strategies.

5. Partial withdrawal option – It allows you to make partial withdrawal in case of any uncalled medical emergency or contingency after completion of lock-in period.

ULIP is a perfect investment option if you are looking for long term wealth creation. It could be buying your own house, a new car, going on a long vacation, or your child’s higher education or marriage, ULIP helps you to meet all your long-term financial goals. Moreover, it comes with a lock-in period of 5 years which keep you invested for a longer period and helps you earn better returns. The lock-in period is calculated from the date when the policy is issued.

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