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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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