ULIP Vs Mutual Fund SIP — How ULIP Can Be a Good Option Too

Investors go through the most common dilemma of choosing between the Unit Linked Insurance Policy and the Systematic Investment Plan. The question is always asked — Which one of the two is better for investment plans? First, before deciding which one is better, let us go through what the two investment plans offer.

What is ULIP?

The full form of the ULIP plan is the Unit Linked Insurance Policy that is a combination of investment and insurance that has linked market returns. Unlike endowment insurances, the returns on investment are not guaranteed under this plan. Through this policy, you invest in different kinds of assets, such as Debt, Equity, Government Bonds, Gold Bonds, etc. A part of ULIP policy goes for investment and insurance cover. You also get the chance to make investments in bonds and stocks. Unit Linked Insurance plans are unique that offer various benefits. You can buy ULIP plan to get good returns and invest it to meet long-term goals.

What is SIP?

SIP’s full form is Systematic Investment Plan which is an investment method. It gained popularity when it got linked to Mutual funds. When you systematically accumulate money on a monthly, yearly, or quarterly basis, it is known as SIP. It is an excellent way to build up wealth to reach financial goals by investing in mutual funds through SIP. It offers good returns if you invest money for a long period.

You must keep in mind the two points to become a successful investor. Firstly, you must determine which investment instrument yields safe and good returns in the short and long term. ULIP and SIP, both help the investors in achieving short and long-term financial goals.

Now let us look at the differences between ULIP and SIP:

1. Instrument type: ULIP plan offers the combined benefit of both investment and insurance. SIP offers only investment benefits.
2. Tax benefit: You can avail of tax benefit as per Section 80C of the IT Act for ULIPs paid by you.
3. Investment mix: ULIP offers investment options in both debt and equity markets. In SIP, investments are mainly focused on the equity market.
4. Switching option: Under the ULIP plan you can switch investment options from one asset to another as per your requirement. You can shift your investment more to equity during the early years of your life. Your risk-taking capability is also less during that time. In SIP, you have no switching option. You have to stay invested in one asset for three years. You are allowed to withdraw the amount only after the completion of 3 years since the time you invested.
5. Life cover: Under the ULIP plan, the life cover is offered to the family members of the insurer. Whereas, in SIP no life cover is offered.
6. Lock-in period: The Lock-In period for ULIP is five years. If you fail to pay the premium in the following years, a sum will be deducted from your invested amount. You must continue with the premium policy of ULIP. In case you surrender or stop the Policy before the period of five years, you will get income tax consideration. The lock-in period of SIP is three years. Every investment you make through SIP, you get a separate lock of a total of 3 years.
7. Death benefit: Under the ULIP plan, if the insured person dies the beneficiary will be paid the Death Benefit. In SIP, there is no death benefit paid.
8. Fund management charges: the fund management charge of ULIP is 1.35% and of SPI it is 2.50%.
9. Charges: The charges of fund management of ULIP are higher than the sip. In the initial years, the premium allocation has a higher charge in ULIP. The charges reduce with every passing year. As the charges decrease, the effectiveness of the invested amount increases. This is the reason, why ULIPs maximize the return benefits if continued for the long term. The charges for SIP depend on the expense ratio that is generally between 2–3%. If you directly invest in Mutual Funds, the expense ratio will be even lesser and yield larger returns.

Conclusion:

The risk factor in SIP investment is a lot higher than in the ULIP plan. Though sip is riskier it fetches you higher returns if kept invested for a longer period. On the other hand, ULIPs are focused on investing in lower risky funds. It reduces the chances of negative effects on the invested amount. Therefore, to choose which one is a better option you must ask yourself the following questions:

1. Do you require life insurance cover for your family?
2. What is your investment horizon?
3. What is your risk appetite?
4. What are your financial goals?
5. Do you want to have emergency savings?

ULIP is a better investment option if you are looking for insurance cover and wealth-creation by investing your money for a long period. Therefore, you can compare the ULIP plan online by looking at several factors of the policy offered. There are many ULIP plans available with various strategic investment plans. You must go through these to choose which one suits you the most.