ULIP or SIP – Which Is a Better Investment Option?

What is ULIP?

A unit-linked insurance plan or ULIP is an investment instrument that combines the benefits of insurance and investment. The investment instrument offers the dual benefits of building a life cover and also promising market-linked returns.

How does it work? A portion of the premium you pay goes towards building a life cover, and the remaining amount is invested in an investment asset of your choice, such as funds, bonds, or stocks.

What is SIP?

A systematic investment plan or SIP, is a method of investing in any scheme or asset. Through SIP, investors can automate investments at regular intervals and specified amounts. SIP is primarily known for building a systematic and disciplined investment approach.

How does it work? You invest small amounts of funds over a long period in a fund of your choice rather than investing a large sum at once.

ULIP Vs SIP: Differences You Should Know

Let’s understand the difference between ULIP plans and SIP:

Making the Right Investment Decision

When it comes to making the right investment decision, feeling confused is a common experience. Here are some factors that you can consider to deciding whether you should go with ULIPs or SIPs:

Investment Goal

You need to draw a picture of your investment goal to align it with your investment plans. If you are looking for a pure market-based return and want to build a disciplined investment approach, then SIP is the way forward. However, if you want to simplify investment and insurance decisions, then ULIP is a reliable option as it promises dual benefits through a single investment.

Your Risk Tolerance

Every investor has a different appetite for market risks. Since both SIP and ULIP have their risks and reward features, you need to evaluate your risk tolerance better.

For instance, SIP allows investment in a wide range of mutual funds that provide stability. On the other hand, ULIPs come with an additional layer of protection through insurance.

Liquidity and Flexibility

Even if you are investing to meet long-term needs, uncertainties in life can lead to emergency financial needs or a change in financial goals. This is why you must understand the liquidity and flexibility of both investment plans.

What You Should Know?

• ULIPs come with a 5-year lock-in period, whereas SIPs typically don’t have a lock-in period, thus allowing easy partial withdrawals.
• Both SIP and ULIP allow for switching between funds to capitalise on market conditions.

Evaluating the Tax Benefits

When deciding on an investment plan, you must not overlook the tax benefits associated with every plan. Both SIP and ULIP can offer you tax benefits in various forms, allowing you to choose the option that best suits your financial goals.

Tax Benefits You Must Know:

• ULIP: Premiums paid towards a ULIP are eligible for tax deductions under section 80C of the Income Tax Act. Additionally, benefits received upon maturity from a ULIP are exempt from tax liabilities under Section 10(10D) of the Income Tax Act.
• SIP: Since it is an investment method in different types of funds, SIP does not offer direct tax benefits. However, you can claim deductions up to ₹1.5 lakhs for ELSS investments through SIP, under section 80C of the Income Tax Act.

Investment Costs

Remember that the investment instrument you choose comes with certain costs, such as maintenance, mortality, and fund management. Make sure to carefully analyse the costs associated with both ULIP and SIP before you decide, as hidden charges might not seem high initially but can impact your returns significantly in the long run.

Over to You

Choosing between SIP and ULIP can seem overwhelming at first, but once you have understood their unique features, you can easily make an informed decision. Remember that ULIP is primarily a life insurance plan that offers life cover along with market-linked returns.

On the other hand, SIP is an investment method that allows you to systematically and periodically invest in a mutual fund of your choice, thereby benefiting from its returns. Since both SIP and ULIP come with multiple options and features, you can head to Jio Insurance Broking to evaluate and compare different plans before making an investment decision.