ULIP Vs SIP

Table of Content

1. What Is ULIP?

2. What Is SIP?

3. Core Functions of ULIP and SIP

4. How to Calculate the Returns on Your Investments in ULIPs and SIPs?

5. What Is the Difference Based on Tax Benefits¹

6. Factors to Consider before Choosing between ULIP and SIP

7. ULIP or SIP- Which Is Better?

8. FAQs on ULIP vs SIP

Investing is the most effective way of growing your money in a better way to create wealth for your future. However, choosing the correct investment according to your risk tolerance and financial needs is crucial. In this blog, we will go through a detailed comparison of ULIP vs SIP to decide which one is better for your investment journey.

What Is ULIP?

ULIP is a unique financial product. This product blends life insurance protection with market-associated investments. When you pay the premium, then one part goes towards securing your life cover. The remaining is invested in funds of your choice, whether in equity, debt or a mix of both, i.e., hybrid. 

ULIPs also offer flexibility to switch between these funds as your life goals or risk appetite level change. A major feature is the mandatory five-year lock-in, which encourages disciplined and long-term savings. 

Alongside wealth creation, ULIPs even provide tax benefits as per Section 80C and tax-free maturity as per Section 10(10D)¹. Such tax-related benefits make them a prudent investment plans for goal-based financial planning.

What Is SIP?

An SIP is a simple and disciplined way of investing in mutual fund schemes, where you contribute a fixed amount at periodic intervals, generally monthly or quarterly. Unlike any financial product, SIP is a route that assists you in investing steadily. 

The chosen amount gets auto-debited from your bank account and used to purchase mutual fund units. This approach activates the rupee cost-averaging benefit. This means you purchase more units when markets are low and fewer when they are high, minimising volatility impact. 

Over a long time, compounding turns small and consistent investments into considerable wealth. SIPs also offer flexibility; you can increase, decrease, pause or stop them according to your situation. With low entry points (beginning from ₹500), SIPs are best for long-term wealth creation, retirement planning and goals like kids’ higher education.

Core Functions of ULIP and SIP

To understand ULIPs and SIPs better, it is useful to see how they vary on important points.

How to Calculate the Returns on Your Investments in ULIPs and SIPs?

To compute the returns on your SIP investments, you can use an online SIP calculator. This will assist you in making a well-informed decision by computing the anticipated return on your investments.

Enter your age, investment amount, payment interval, duration and your anticipated returns per year. After you click on the submit button, you can get a detailed calculation based on your inputs.

To calculate returns from a ULIP investment, you can use a ULIP calculator. Enter your age, investment frequency, amount and maturity period to get the results.

What Is the Difference Based on Tax Benefits¹

Follow this table to find out the how ULIP stand out of SIP based on their tax benefits¹: 

Note: If assessee has opted for Old tax regime, assessee shall be eligible to claim deduction under chapter VI-A (like Section 80C, 80D, 80CCC, etc). If assessee opted for New tax regime only few deductions under Chapter VI-A such as 80JJAA, 80CCD(2), 80CCH(2) are available.

Factors to Consider before Choosing between ULIP and SIP

The major difference is that ULIP offers you life insurance coverage, whereas SIP investments do not have the opportunity of insurance protection. However, SIP is one of the best ways of investing your money in mutual funds to create wealth by investing a small amount at a fixed interval. 

Before deciding between ULIP and SIP, you must consider the following points:

• Risk profile:

If you understand the points about ULIP or SIP, you should know your risk tolerance or risk profile. The risk of both a ULIP and SIP plan depends on the funds they invest in. 

Typically, mutual funds carry lower risks. However, ULIPs can give more returns due to their insurance component.

• Flexibility:

SIP is more flexible in terms of the investment amount, intervals, and discontinuation. Whereas ULIPs are more flexible in terms of fund switching between debt, equity or hybrid funds depending on market conditions and risk tolerance.

• Objective:

The main objective of SIP is only to invest money and wealth creation. However, ULIP helps you to invest your money as well as gives you life insurance protection.

• Returns:

ULIPs can provide higher returns than SIPs. However, the returns are not guaranteed at the time of maturity. On the other hand, an SIP is more stable and better for long-term wealth creation.

• Coverage:

In a ULIP (Unit Linked Insurance Plan), the amount that is paid out in the event of the policyholder's unfortunate death is typically the sum assured or the fund value, whichever is higher.

• Sum Assured: This is the minimum amount that the beneficiary will receive, irrespective of the performance of the investments.

• Fund Value: This is the value of the investments in the ULIP, which fluctuates based on market conditions.

So, in the case of death, if the fund value is higher than the sum assured, the fund value will be paid. If the sum assured is higher, then that amount will be paid to the beneficiary. It’s important to check the specific terms and conditions of the ULIP policy to confirm the exact payout structure.

For SIP  investments, there is no life insurance coverage. An SIP is just a method of investing in mutual funds, and in the event of death, the funds would be transferred according to the nominee's details, but there is no "sum assured" in the traditional sense like in ULIPs.  

• Charges:

ULIPs levy multiple charges. These are mortality charges for life cover, policy administration charges and fund management fees. SIPs, on the other hand, just charge an expense ratio. As these costs lower net returns, examining charges is crucial before investing.

• Liquidity

ULIPs have a mandatory five-year lock-in period, with partial withdrawals allowed only after this duration. SIPs, in contrast, endow a high level of liquidity (except ELSS, as it comes with a three-year lock-in). For investors looking for quick access to funds, SIPs are a more flexible option

ULIP or SIP- Which Is Better?

The correct choice must be based on your financial priorities, time horizon and insurance needs.

When is ULIP a better choice? ULIPs are ideal for those who prefer a single product that combines life insurance with investment. They work well for long-term goals (five plus years) due to the five-year lock-in and also permit fund switching without attracting any capital gains tax.

When is SIP better? SIPs suit investors focused purely on wealth creation with high liquidity. With only an expense ratio as a charge, they are cost-efficient and flexible, making them suitable for both medium- and long-term goals.

A crucial factor to consider is charges. ULIPs have multiple costs that can affect net returns, while SIPs stay relatively low-cost. Ultimately, match your selection with your life goals, time horizon and risk profile, and look out for professional advice before making any investment decision.

FAQs on ULIP vs SIP

1.  What are the differences between ULIP And SIP?

ULIP is a financial product where you can enjoy various benefits of both investments and insurance. An SIP is purely an investment method in mutual funds, focused only on wealth creation.

Also, ULIPs differ from SIPs in terms of lock-in, charges, and flexibility. While ULIPs combine insurance with investment and allow fund switching, SIPs are simpler, low-cost and more liquid.

2. Which is better - SIP or ULIP?

The decision is up to the investor or the buyer making this decision. If you want to make a disciplined investment with the benefits of lower costs, better performance and more fund options, you can opt for SIP. 

On the other hand, if you are interested in tax advantages¹, simple switching options, along with life insurance cover, you may choose a ULIP plan.

3. Do ULIPs give high returns?

Yes. ULIPs provide good returns along with insurance benefits if you choose the equity option. However, the returns are not guaranteed.

4. How can I calculate my ULIP returns?

You can calculate your ULIP returns easily by calculating the difference between the current Net Asset Value (NAV) and the invested NAV value. This is one of the easiest ways to track your returns regularly.

5. Is ULIP better than SIP?

If your goal is only to invest money, a ULIP may not be a better option. But if you want to get insurance and investment benefits in a single financial product, it is better to purchase a ULIP plan instead of investing via an SIP.

6. Which is better for long-term investment?

Both ULIPs and SIPs can work well for long-term goals. But their suitability must be based on your needs. ULIPs are better if you want insurance plus investment in one plan, particularly with the five-year lock-in that promotes discipline.

SIPs are better if you want pure wealth creation,  low-cost way to invest and high-level liquidity.

7. Is ULIP a safer investment option for a child’s education?

For a child’s higher education, ULIPs endow life cover plus investment benefits, ensuring financial security even if something happens to the policyholder. SIPs, while excellent for steady wealth creation, do not offer insurance protection. 

Hence, if safety and protection are priorities, a ULIP might be more suitable, while SIPs work well if you already have insurance separately.

Related Articles:

• Complete Comparison of ULIP Plans
• ELSS and ULIP - Detailed Comparison