ULIP vs SIP – Which is a better investment option?

SIPs offer better short-term liquidity and may yield higher returns in equity funds, while ULIPs provide life insurance with investment. ULIPs have a lock-in period, whereas SIPs offer flexibility, making them ideal for goal-based investing.
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ULIP vs SIP – Which is a better investment option?
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3 mins
01-April-2025

When it comes to investing in India, Unit Linked Insurance Plans (ULIPs) and Systematic Investment Plans (SIPs) are among the most popular choices among investors. While both investment options have their advantages, they also come with their own unique features, costs, and benefits. In this article, we will explore the differences between ULIPs and SIPs and help you decide which is the better choice to help you achieve your investment and wealth creation goals.

What are differences between ULIP and SIP?

Given below are the detailed advantages of ULIP and SIP for your reference:

Unit-Linked Insurance Plan

Systematic Investment Plans

Triple benefits: ULIPs are insurance cum investment products, where a certain portion of the premium you pay goes into providing life cover. In contrast, another part is invested in the markets to earn returns and build wealth. ULIPs offer triple advantage of life cover, wealth creation, and tax benefits.

The habit of disciplined savings: SIPs inculcate the habit of disciplined savings, essential for long-term wealth creation to address various goals. A certain amount is deducted from your account each month and invested on your behalf through the auto-debit facility.

Choosing the preferred asset class: ULIPs give you the benefit to choose your preferred asset class based on your risk appetite. If you are an aggressive investor, you can select equities. On the other hand, if you are a moderate investor, you can choose debt funds. You can switch between funds within the ULIP.

Start with a small amount: The beauty of SIP is that you can start with a small amount, as low as Rs. 100. With time, as your income increases, you can increase the amount accordingly to build the desired corpus. When you stay invested for an extended period, you gain from the power of compounding. Assuming returns of 12%, a monthly investment of Rs. 1,000 for 10 years would grow above Rs. 2 lakh.

Partial withdrawals: ULIPs allow you to make partial withdrawals after the mandatory 5-year lock-in period. You can withdraw an amount as per your needs and goals. Though there aren’t any rules on the amount you start to withdraw, make sure you don’t withdraw huge sums, which might lead to policy termination.

Protect against market volatility: Since SIPs spread your investments over a long period, it protects your corpus from a significant dip when the market turns sour. A drop in the corpus can affect your financial goals.

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What are the differences between SIP and ULIP based on tax benefits?

Both SIP and ULIP offer tax benefits, but in different ways:

Tax benefits

SIP

ULIP

Tax deduction

Under section 80c, up to Rs.1.5 lakh

Under section 80c, up to Rs.1.5 lakh

Tax on returns

Tax on returns depends on the fund type (equity or debt)

Tax on returns is treated as capital gains, depending on the holding period

Tax-free returns

Long-term capital gains are tax-free after 3 years (equity)

ULIPs offer tax-free returns after a 5-year lock-in period

 

Factors to consider when choosing ULIP or SIP

1. Returns on investment:

The returns on investment play a critical role in determining the best investment strategy between ULIP and SIP. ULIPs, being market-linked investments, have the potential to provide higher returns based on market performance. However, the returns are not guaranteed, and the risk associated with ULIPs may be higher when compared to SIPs. SIPs are more stable with predictable returns, although they may not provide rapid wealth creation like ULIPs.

2. Liquidity:

Liquidity is another important factor to consider when choosing between ULIP and SIP. ULIPs have minimum lock-in periods of 5 years, making it difficult to access funds in case of emergency. Some of the partial withdrawals are possible for meeting emergencies and higher education needs of the policyholder for children. During the lock-in period, if you make any partial withdrawals, the sum assured automatically reduces to the extent of the withdrawal. Conversely, SIPs are liquid and do not have a lock-in period. Investors can withdraw their funds, partly or entirely, anytime they require.

3. Flexibility:

While SIPs are flexible in terms of the amount invested or discontinued, ULIPs offer flexibility in terms of switching your allocation between equity, debt, or hybrid funds depending on your risk appetite and market conditions. Some ULIPs also offer riders such as accidental death, disability, hospitalisation, and so on for a comprehensive protection plan.

4. Costs:

The costs charged for ULIPs, and SIPs are vastly different. ULIPs come with a variety of charges like mortality charges, premium allocation charges, administration charges, and fund management charges that eat away at the corpus, which could have been invested for returns. SIPs, on the other hand, have no charges except the expense ratio, which varies depending on the management fee.

ULIP or SIP: Which is better?

When comparing SIP or ULIP, it’s essential to consider your financial objectives. ULIPs combine life insurance with investment, offering market-linked returns and tax benefits. SIPs, on the other hand, are purely investment-focused, providing flexibility and liquidity in mutual funds. If you need insurance with investment growth, ULIPs are ideal. But if you prioritize wealth creation without insurance, SIPs are a better option. Choose based on your risk appetite and financial goals.

Conclusion

In conclusion, choosing between ULIP and SIP depends on individual investment needs, goals, and risk appetite. A decision to invest in any of these options should revolve around comparing the returns of both options, liquidity, costs, and flexibility. Although a number of charges associated with ULIPs that can erode the corpus before yielding returns or insurance benefits, it caters to both investment and insurance – making it a comprehensive option for investors.

Similarly, SIPs are the preferred mode of investment for low-risk takers as they do not require lock-in or high charges. It is essential to consider all the features and evaluate risk and return potential before investing in either of these options. A judicious mix of both ULIP and SIP can also spread the risk across the portfolio items. It is advisable to seek the advice of a financial advisor before investing in any equity-linked product.

Frequently asked questions

What is the main difference between ULIP and SIP?

ULIPs offer both life insurance and investment opportunities, with returns linked to market performance. SIPs, on the other hand, are purely investment plans focused on mutual fund contributions.

Which is better SIP or ULIP?

SIPs are ideal for investors seeking pure wealth creation with flexibility and no insurance coverage. ULIPs, however, combine investment and insurance benefits, making them suitable for those seeking both.

Which is better: ULIP vs SIP for long-term financial goals?

For long-term financial goals, SIPs typically outperform ULIPs due to better market exposure and lower charges. ULIPs are suited for those needing life coverage alongside their investments but with higher costs.

How does a ULIP vs SIP calculator work?

A ULIP vs SIP calculator compares the potential returns of each investment option by factoring in monthly contributions, investment duration, and market performance, helping you make an informed choice.

What is the difference between SIP and ULIP in terms of flexibility?

SIPs are more flexible as they allow easy withdrawals, no lock-in period, and varying contributions. ULIPs have a lock-in period and limited withdrawal options, making them less flexible than SIPs.

Which offers better returns: SIP vs ULIP?

SIPs generally offer better returns due to lower charges and more direct exposure to market growth. ULIPs might provide comparable returns but often come with higher management fees and insurance costs.

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