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Investing is purchasing a financial asset for generating income or capital appreciation. Appreciations have the potential to create a financial corpus over time. Market-linked instruments can aid in achieving appreciation. The performance of these instruments depends on the performance of the underlying assets, which could be debt or equity. Unit Linked Insurance Plans (ULIP) and Systematic Investment Plans (SIP) are popular choices in this domain. The distinct functionality of both highlights the analysis between SIP and ULIP.
What is ULIP?
ULIP is a single financial instrument with twin product offerings. It provides a combination of insurance and investments. Hence, investing in ULIP provides life coverage and access to equity and/or bond markets. But how does a ULIP plan work? The application of the premium amount is partly towards the insurance coverage and the balance towards investment. You choose the fund type for investment. It may be debt, equity, or hybrid, as per your preferences.
What is SIP?
A SIP is a mode of investment in mutual funds. Through a SIP, you can invest a specific amount over a predetermined tenure at decided frequencies. The periodicity of a SIP can be monthly, quarterly, or annually. Depending on the funds a mutual fund invests in, they are classified into debt, equity, and hybrid mutual funds. You can start a SIP for a fund type that matches your investment goals.
ULIP and Mutual Fund SIP - Product Features
Below is an illustration of SIP and ULIP across varying parameters.
Particulars |
ULIP |
SIP |
Basic Features |
It is an insurance product as well as an investment vehicle. Hence, ULIP has the added advantage of getting life coverage. |
SIP is a mode of investment in mutual funds. |
Regulating Authority |
Insurance Regulatory and Development Authority of India (IRDAI) regulates ULIPs. |
The Securities Exchange Board of India (SEBI) governs SIPs. |
Tenure |
The maximum tenure of investment equals the term of the insurance plan. |
You can continue to invest through SIP as long as desired. |
Lock-in Period |
Investments in ULIP are subject to a lock-in of 5 years. |
If the SIP is for investing in Equity Linked Saving Scheme (ELSS), withdrawal restrictions exist in the first 3 years. |
Option to Switch |
If today you have opted for an equity investment, you have the flexibility to switch the fund type later. |
To switch the mutual fund type, the previous SIP is redeemed for making a fresh investment. |
Charges |
It includes charges towards premium allocation, fund management, administrative and mortality, amongst others. |
Depending on the scheme type, SIP is subject to entry and exit loads. |
Potential Risks |
Market-linked investments are subject to market risk. However, ULIP offers guaranteed1 life coverage. |
Investments in stocks carry risk, owing to market volatility. |
ULIP and Mutual Fund SIP – Taxation*
Below are the tax* benefits and treatment for ULIP and SIP.
Particulars |
ULIP |
SIP |
Section 80C |
What amount of ULIP premium is deductible? The premium amount is deductible up to ₹1.5 Lakh, subject to a maximum of:
|
What amount of SIP payment is eligible for the deduction? A SIP registered only for ELSS is eligible for deduction up to an amount of ₹1.5 Lakh. |
Section 10(10D) |
Is the maturity amount of ULIP taxable*? The maturity claims are not taxable*, provided the premium paid is less than:
Besides, the death claim is fully tax-free. |
Is the maturity amount of SIP taxable*? As SIP does not have the maturity or death benefits, these exemptions under section 10 (10D) are not applicable. |
Long Term Capital Gains (LTCG) |
Is ULIP tax-free? ULIPs are exempted from LTCG taxes* subject to condition that date of issuance must be before 1st February 2021. |
Are gains from SIP tax-free? LTCG above ₹1 Lakh is taxable* at 10% in the case of equity mutual funds. And, in the case of debt mutual funds, the entire gains are taxable* at 20% after indexation. |
Choosing your Investment
You must consider your investment preferences and financial goals before deciding to invest. However, ULIP have the added advantage of life coverage. Given the uncertainties in life, it is highly recommended to have your life insured. The COVID-19 pandemic has reiterated the importance of life insurance.
Life insurance, as a financial planning tool, comes with its own set of benefits. For one, you can avail of a life insurance cover along with a ULIP to get the dual benefits of investment and insurance. Moreover, even when you opt for a simple life cover, you can still get extensive life insurance coverage for yourself and your loved ones.
Life insurance plans also offer a host of other benefits, depending on the type of policy you choose. For instance, you can have a savings plan and avoid all the risks associated with ULIPs. Retirement insurance plans are also an effective way of planning your retirement.
If you have a life insurance plan or are planning to buy one, it is imperative that you understand the multiple benefits of getting life insurance coverage. Very importantly, in the event of your death, your nominee can file a death claim and the sum assured benefit under the policy can be paid out to your family. This sum assured can support them financially in your absence and help them sustain their livelihood.
The death benefits from your life insurance plan can also secure your family against unpaid loans and debts. If you have pending loans and debts, you should try to pay them off at the earliest. But in case you are unable to do so, the sum assured saves your family from the financial obligation of paying off these loans. Even in the case of retirement planning, your retirement life insurance plan should be able to pay off your unpaid debts so that your golden years are secure and free from worries.
Some life insurance plans also pay out a maturity benefit. Such savings plans can be beneficial for planning long-term goals. When you outlive the policy term, you can file a claim for these benefits and utilise for all your financial commitments.
You can consider investing in ULIP to address protection and investment needs simultaneously. There are a large number of insurance agents in the market. However, you must contact a creditable insurance company to ensure timely support and claim settlement in your absence.
TATA AIA Life Insurance has established its presence in the country over the last 2 decades. It is one of the most popular players in the insurance segment, having custom-made offerings. Consulting a TATA AIA Life Insurance advisor shall be useful in selecting the most appropriate ULIP Wealth Solutions to suit your requirements.
Let’s consider the example of Ravi and Anil, where both had an equal amount for investing. Ravi chose to start a SIP, whereas Anil opted for a ULIP. At the end of the financial year, both decided to evaluate their investments and the corresponding benefits. Ravi evaluated the market-driven booked by the SIP. Anil assessed the market-driven growth as well; he also relished added benefits in the form of maturity and death claims. Further, Anil was at peace to create financial security for his family to combat the occurrence of any unfortunate event.
To Conclude
Every investment is backed by an objective. It is thus important to evaluate your financial goals before investing. Further, you should also consider the future security of your loved ones while making the investment plan. Thus, you must assess the features of ULIP and SIP simultaneously in light of your investment preferences. This shall aid in making an informed choice.
L&C/Advt/2023/Mar/0892
