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ULIP vs. SIP - Know the Difference

ULIP and SIP are investment instruments that can prove useful in meeting the financial needs of investors

Wednesday September 23, 2020 7:02 AM, ummid.com News Network

Investment plans

Intelligent investors have the knack of identifying the right investment opportunities that can provide them with lucrative returns within a realistic period. To emerge as a successful investor, it is advisable to invest a portion of your income frequently to achieve short-term and long-term monetary objectives.

Unit-Linked Insurance Plan (ULIP) and Systematic Investment Plan (SIP) are investment instruments that can prove useful in meeting the financial needs of investors. The biggest confusion that an investor is facing today is whether to invest in ULIP or SIP. Investors are curious to know which investment alternative is better. To clear your doubts, here is a quick guide that can help you determine which a more useful option is.

Before comparing the two, let us first understand what is ULIP policy and SIP.

What is ULIP?

Unit-Linked Insurance Plan (ULIP) is an insurance cum investment instrument. The amount that you pay towards the premium is invested on your behest in equity, debt, or balanced funds. ULIP is an ideal tool for long-term wealth creation.

What is SIP?

SIP is an investment option that allows you to invest small amounts in mutual funds periodically, instead of investing a lump sum. Usually, the frequency of payments in SIPs is monthly or quarterly. However, there are yearly SIPs as well. In the long term, an SIP helps you to build a corpus to meet your financial goals and requirements.

Distinguishing points between ULIP and SIP

If you wonder, why should I invest in ULIP now, then understand the differences between this instrument and SIP. Here, we have compared various factors in detail:

1. Benefits

ULIP is a life insurance product, which also has an investment component. Conversely, an SIP is purely an investment avenue where a specified sum is invested periodically in mutual funds to earn good returns in the end. ULIP benefits of insurance and investment make it a superior choice as compared to an SIP.

2. Tax benefits

Under Section 80C of the Income Tax Act 1961, your premium is permissible for a deduction. The allowable limit is INR 1.5 lakh per annum. On the contrary, SIPs do not offer any tax benefits. However, only investments in Equity-Linked Savings Scheme (ELSS) mutual funds provide the same tax exemption as ULIP. Moreover, ULIP’s maturity benefit is tax-exempt as per Section 10 (10D) falling under the Income Tax Act, 1961. In contrast, maturity proceeds earned from an SIP are subject to taxation.

3. Returns

The returns in both ULIP and SIP are completely dependent on the fund’s performance in the market. Therefore, it becomes essential to determine the risks associated with them. ULIP returns are less risky when compared to an SIP as you have an option to invest in equity, debt, or balanced funds. Besides this, in the case of ULIPs, you can switch from one fund to another based on the market's volatility. Doing this protects your ULIP investment plan from the market's poor performance during an uncertain situation.

Contrarily, SIPs do not provide the flexibility to shift from one plan to another, making your investments vulnerable to the equity market’s fluctuations. This ULIP benefit makes it a higher return-generating investment avenue as compared to an SIP.

4. Death benefits

As an SIP is not an insurance product, the perquisites of death benefits are only available for ULIP investors.

ULIP benefits make it a more promising investment instrument as compared to an SIP. You can consider investing in a suitable ULIP if you are looking for a life insurance cover along with the opportunity of building wealth in the end.

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