ULIP Vs SIP – What are the Differences?

ULIP Vs SIP – Basics

ULIP stands for Unit Linked Insurance Plan. It is an investment cum insurance product. A ULIP policy invests your money in market-linked financial instruments like equity, debt, hybrid, or liquid funds and provide you with a life cover as well. On the other hand, SIP stands for Systematic Investment Plan. SIPs enable you to invest a predetermined amount at periodic intervals in a mutual fund.

How do ULIPs and SIPs Differ?

  • Types

There are mainly two types of ULIPs – Type 1 and Type 2. Unfortunately, if the policyholder passes away, a Type 1 ULIP will pay the greater of the sum assured or the fund value, while a Type 2 ULIP will pay the sum assured. On the contrary, mutual funds can be broadly categorised into equity, fixed income, liquid, gilt, and hybrid funds.

  • Risk and Returns

Both ULIPs and SIPs are investment options are subject to market risks, and therefore, returns from them are primarily dependent on market conditions. Moreover, returns vary as per the chosen fund type too. Equity funds carry high risk but have a high return generation potential. Conversely, debt or liquid funds carry relatively lower risks but generate lower returns. Hybrid funds offer a middle ground between equity and debt funds in terms of risk and return.

Usually, a ULIP policy invests in less risky funds as it encompasses insurance cover too. ULIP fund managers focus on minimising adverse impacts on the invested capital pool. Thus, returns from a ULIP policy may be lower than traditional equity or hybrid mutual fund SIPs. However, ULIPs are relatively safer investment options. Based on current economic conditions and past ULIP performance, you can estimate returns beforehand and invest accordingly.

  • Life Protection Benefit

The double advantage of capital appreciation and life protection coverage is what gives ULIPs an edge over SIPs. Life insurance benefit is absent in SIPs.

  • Tax Benefits

Under the old tax regime, the maturity proceeds of a ULIP policy are eligible for tax deductions under Section 10(10D) of ITA. However, the annual premium must be lower than 10% of the sum assured to avail tax benefits on the maturity amount.

As per the revised tax proposal in Budget 2021, returns on ULIP policies with annual premiums greater than Rs 2.5 lakh will be treated as capital gains. Depending on the holding period of the ULIP policy, you are liable to pay 15% STCG tax under Section 111A or 10% LTCG tax without indexation benefit under Section 112A.

Section 80C deductions on ULIP policies remain intact under both new and old tax regimes. You can claim a maximum of up to Rs 1,50,000 tax deduction on ULIP premiums paid. However, the actual deduction amount received will vary as per your tax slab.

Among mutual funds, only ELSS funds are eligible for tax rebates under Section 80C, as per old tax rules. Under new tax provisions, Section 80C deductions do not apply to ELSS funds.

Other Differences Between ULIPs and SIPs

Point of Distinction ULIP SIP
Prime governing authority IRDAI SEBI
Minimum lock-in period 5 years Open-ended mutual funds have no prescribed minimum lock-in periods. Close-ended funds and ELSS funds have a minimum lock-in period of 3 years.
Fund management charges ULIP fund management charges go up to 1.35% p.a. of fund value. SIP fund management charges are higher – between 1.5% – 2.5% p.a.
Flexibility You can easily switch between multiple fund options based on changing market dynamics. You cannot switch funds till investment tenure is over.

Final Words

ULIPs bridge the gap between conventional life insurance plans and mutual fund schemes. Under the new tax rule, all ULIP policies with annual premiums exceeding Rs 2.5 lakhs are no longer tax-exempt under Section 10(10D). However, the new tax law is applicable only if the ULIP policy is purchased after February 1, 2021.

SIP and ULIP performances and subsequent returns are determined by market forces and the fund type chosen for investment. If you have a low to medium risk tolerance and want to achieve the twin goals of wealth creation and life cover along with tax savings, then ULIPs are good investment options for you.

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