ULIP vs SIP – Which is a better investment option?

Compare ULIP and SIP investment options by tax benefits, returns, and flexibility. Know how to choose the right option based on your financial goals and long-term investment needs.
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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 is a ULIP?

A ULIP, or Unit Linked Insurance Plan, is a unique financial product that combines life insurance with investment opportunities. When you invest in ULIP plans, a portion of your premium goes toward life cover, while the rest is invested in equity, debt, or balanced funds—depending on your risk preference. This means you're not just protecting your family but also growing your wealth over time. ULIPs are ideal for goal-based savings like children’s education or retirement planning, offering flexibility, transparency, and tax benefits.

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What is an SIP?

A Systematic Investment Plan (SIP) is a disciplined way to invest regularly in mutual funds. SIPs allow you to invest a fixed amount every month, making it easier to stay consistent and build wealth gradually. It’s great for those who want to benefit from rupee cost averaging and compounding without actively timing the market. While SIPs focus purely on wealth creation, they don’t offer insurance benefits.

Curious about which is better for your goals—ULIP plan vs SIP? Read on as we break down the differences and help you choose what suits your future best.

What are differences between ULIP and SIP?

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

Feature

Unit-Linked Insurance Plan (ULIP)

Systematic Investment Plan (SIP)

What it offers

ULIPs offer a triple benefit – life insurance cover, market-linked investment, and tax savings – all in one plan.

SIPs help you develop a disciplined saving habit, ideal for long-term wealth creation through monthly contributions.

Investment flexibility

You can choose between equity, debt, or balanced funds based on your risk appetite. ULIPs also let you switch between funds during the policy term.

You can start small – even with Rs. 100 per month. Over time, you can increase your investment and benefit from compounding.

Liquidity

ULIPs allow partial withdrawals after 5 years. This flexibility helps you meet unexpected financial needs.

SIPs offer complete flexibility – you can redeem anytime without a lock-in (except for ELSS).

Market protection

ULIPs are market-linked but come with life cover, so your family stays financially protected.

SIPs reduce risk through rupee-cost averaging – perfect for riding out market volatility over time.

Tax benefits

ULIP premiums qualify for tax deduction under Section 80C, and maturity benefits may be tax-free under Section 10(10D).*

SIPs in ELSS funds offer tax benefits under Section 80C, but other mutual funds don’t provide any tax deductions.

Pro Tip

Secure your future with ULIP – a smart dual-benefit plan offering investment growth and life cover at affordable premiums

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

Both SIP and ULIP offer tax benefits differently—ULIP tax benefits include deductions under Sections 80C and 10(10D), while SIPs in ELSS funds qualify for Section 80C deductions.

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

 

How to calculate the returns on your ULIP vs SIP investments?

When comparing your investments in a ULIP plan vs SIP, it’s important to understand how returns are calculated for each. For ULIP plans, returns depend on the fund performance (equity or debt), charges deducted, and market trends. You can check the Net Asset Value (NAV) regularly to track how your money is growing. In contrast, SIP returns are calculated using the compound interest formula, often expressed as XIRR (Extended Internal Rate of Return), which accounts for periodic investments over time. While SIPs give clearer return visibility, ULIPs provide life cover alongside market-linked returns. Before choosing, consider your goals—wealth creation with insurance (ULIP) or pure investment growth (SIP).

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. If your focus is purely on protection, a term insurance plan offers comprehensive coverage at lower costs. But if you prioritize wealth creation without insurance, SIPs are a better option.

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.

Related articles

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Term insurance vs. ULIP

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.

What should you focus on when choosing between ULIP and SIP?

When comparing a ULIP plan vs SIP, consider your goal—ULIP offers life insurance plus investment, while SIP is purely investment-focused. Also assess factors like risk appetite, lock-in period, flexibility, and charges before investing.

Can you invest in both ULIP and SIP simultaneously?

Yes, you can invest in both ULIP and SIP together. Combining them allows you to benefit from insurance cover with ULIPs and disciplined wealth building through SIPs, helping you balance protection and investment goals more effectively.

Can ULIP fund switching work like changing SIP funds?

ULIP plans allow you to switch between equity and debt funds based on your risk preference. Unlike SIPs, where fund changes require stopping and starting new plans, ULIPs offer smoother, in-plan switching flexibility without extra tax implications.

What are the tax rules for early withdrawals in ULIP vs SIP?

ULIPs allow tax-free partial withdrawals after five years. SIP withdrawals before one year from equity funds attract 15% tax on gains. Debt SIPs may have different rules based on duration and type. Always check tax rules before withdrawing.

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