ULIP Vs SIP: Learn the Difference

A unit-linked insurance policy (ULIP) is an insurance product that also acts as an investment avenue for capital growth. On the other hand, a systematic investment plan (SIP) is a mode of investment that allows you to invest a particular amount in different mutual fund schemes periodically (monthly, quarterly, bi-annually or yearly) to generate long-term returns and capital gains. SIP doesn't offer a life cover.

To choose the best investment plan, here are some basic points of difference between ULIP and SIP.

Tax Benefits

Generally, an SIP doesn't offer the advantage of tax exemptions. Only a particular kind of equity mutual fund called an equity-linked savings scheme allows a tax deduction of up to ₹1,50,000 according to the Income Tax Act, Section 80C.

On the other hand, you can get tax benefits on premium payments towards a ULIP plan up to ₹1,50,000 according to Sections 10D and 80C. Plus the death benefit is tax-free under Income Tax Act provisions.

Fund Management Charges

A ULIP policy is subject to a maximum fund management fee of 1.35% as per the Insurance Regulatory and Development Authority of India (IRDAI). Besides, other charges can apply to the plan. These include fees for administration, mortality, premium allocation and more. But since they are capped under IRDAI regulations, they can't affect your returns in a major way.

A systematic investment plan, on the other hand, is often subject to a fund management fee of 2.5%.

Lock-In Period

A unit-linked insurance plan has a lock-in period of 5 years. However, an SIP plan doesn't have a lock-in period. Only an ELSS fund has a lock-in period of 3 years.

Risk

Both investment avenues have an aspect of risk because both are market-linked. No matter in which instrument you invest, you need to keep in mind your risk appetite and also the desired long-term capital returns.

Death Benefits

You can avail this benefit only in a ULIP policy. Since a ULIP is an insurance option, it pays a death benefit to the beneficiary in the event of the unfortunate demise of the insured. But since SIP is a pure investment option, a death benefit is not available.

Fund Switching

This is another special feature that a ULIP plan has. It allows you to switch between funds for free to make your plan more flexible. You can invest in equities or debt funds or a combination of both.

On the other hand, you can't avail this feature in SIP. That is, you are not allowed to switch between funds throughout your investment period.

Keep the above points of comparison in mind to choose the best investment plan suited to your needs and preferences. You can keep in mind some factors to make a well-informed choice between ULIP and SIP. These are whether you need life insurance or wish to provide your loved ones with financial protection in your absence, what your investment objectives are, whether you wish to save money for retirement or unpredictable major expense and whether you want more flexibility regarding investment.