ULIP vs. SIP: Which One is Better?

As we begin our life in the workforce, we begin taking steps to accomplish all we ever wanted to do. Along with this, we plan to build our financial future through different investments available to us.

Among the different investment instruments, SIP investments and ULIP insurance investments are two of the most sought-after avenues for market-linked investments in India. Both the plans offer their unique features and benefits. But which one should you choose? Let’s look at them individually first.

What are ULIPs?

Unit Linked Insurance Plans are insurance policies that offer the dual benefit of insurance coverage along with market-linked returns. In ULIP plans, the premium amount is split into two parts. The first part of the ULIP policy premium is kept for insurance coverage, and the second part is invested in market-linked securities.

ULIPs allow you to switch between funds during the investment tenure of the plan. This way, you can invest majorly in equity funds during the initial years and move to debt funds when the plan reaches maturity.

This way, you can earn high returns through equity instruments and protect them through debt fund investments. With ULIP insurance, you can build for your future and protect your loved ones simultaneously.

What are SIPs?

In Systematic Investment Plans, you get to invest a predetermined amount in mutual fund investments at regular intervals. You can decide to start a yearly, quarterly or monthly SIP plan. With a SIP plan, you can build wealth for yourself systematically and gradually.

Along with this, SIP investments offer you the benefit of compounding through which you earn interest on the interest you earn.

Difference Between ULIP and Mutual Funds

While both investments can help you grow funds through systematic investments, they do have certain differences. Here are the points for ULIPs vs. SIPs:

1. Instrument type: While SIPs offer the benefit of investments, ULIPs offer the dual benefit of insurance coverage and investment.
2. Investment mix: In ULIPs, you can invest in both the equity and debt market. However, in SIPS, investors generally opt for equity investments.
3. Tax benefit: The tax benefit can be obtained from the premiums paid towards the policy and the maturity amount gained per Section 80C and 10(10D) of the Income Tax Act. However, the tax benefits on SIPs are only applied on Equity-Linked Savings Schemes up to a limit of ₹1.5 lakh.
4. Life coverage: Since SIPs are investment products, they do not offer life coverage. However, ULIPs provide you with the dual benefit of market-linked investments and a life cover.
5. Death benefit: Your loved ones get the sum assured through a ULIP if you pass away before the plan reaches maturity. However, SIP investments do not offer any specific death benefit.
6. Regulation: The IRDAI regulates ULIPS, and The SEBI regulates SIPs.
7. Lock-in period: SIPs have a lock-in period of 3 years, and ULIPs have a lock-in period of 5 years.

Even though they may have certain differences, both the instruments can be profitable for you.

Benefits of ULIPs:

• Triple advantage: With a ULIP investment, you get to protect your loved ones, build wealth and get tax benefits through a single investment. However, the taxation of your ULIP returns will only be applicable if your annual premium amount is up to ₹2.5lakh.
• Loyalty rewards: Many insurers like Tata AIA offer loyalty rewards to the policyholders who purchase the Tata AIA ulip plan. These rewards help you enhance the returns you get through the plan.
• Partial withdrawal: ULIPs allow you to take out partial withdrawals once the lock-in period is over. Therefore, it can be quite beneficial during emergencies. You will get to redeem your investment and still stay invested.

Benefits of SIPs:

• Build the habit of discipline: SIPs help you build the habit of savings. Building the habit of savings can be quite helpful for your financial future.
• Small investments: You can start a SIP investment with an amount as small as ₹500.
• Protection against market volatility: SIPs help you build wealth regardless of the fluctuations that occur in the market.

Conclusion

Thus, SIPs and ULIPs have their advantages. If you’re planning to purchase one of them, learning about their differences will help you make an informed decision. If you’re looking to get the dual benefit of insurance coverage along with investment, opting for ULIPs would be suitable for you. However, if your sole objective is to build wealth, opting for SIPs would be better.