Of course, investing is one sure shot means of securing one’s future. For that, he must be capable enough to find some suitable investment instrument which shall help in reaching his goals. Arguing recently, there were primarily two options: ULIP and SIP. The pros and cons have, since, constantly been argued; hence, which shall be better for whom will depend upon how much an individual understands either of them.
This video explains the comparison between ULIP vs. SIP, discussing the charges of ULIPs and whether that is good or bad for investment in ULIPs. Along with answering some generic questions it tries to answer but is not limited to ‘What is a ULIP?’, ‘What is a ULIP plan in Life Insurance’ etc.
What is ULIP?
ULIP is essentially an insurance product that toggles between life insurance and investment. In other words, when one invests in a ULIP, a portion of the premium paid goes towards buying life insurance and the remaining portion flows into equities, debt, or both.
Full form of ULIP
ULIP is the abbreviation for Unit Linked Insurance Plan, and it has been designed to accord dual benefits of safety arising out of life insurance and growth potential through investment in market-linked returns.
Life Insurance: What is ULIP?
In simple terms, a life insurance ULIP plan invests your money in selected funds-equity, debt, or hybrid-apart from offering life insurance protection for your loved ones against your sudden death. You may enter into the funds and switch over during the policy term according to your risk appetite.
What is a SIP?
On the other hand, Systematic Investment Plan refers to the regular, orderly process of investment of a fixed sum of money from time to time in a mutual fund scheme. It is not an insurance product but regular investment habits in the share market or bond market through mutual funds.
ULIP Charges
The charges involved are amongst the essential factors when considering whether ULIP is a good investment or not. Generally speaking, the charges are higher in ULIPs compared to SIPs because the latter represents complex products that come with dual benefits of insurance and investment.
Type of Charges in ULIP:
Premium Allocation Charges: A certain portion of your premium is deducted upfront for administration and distribution impact fees.
Mortality Charges: These are the costs of the life insurance cover that you get. The charges would depend upon your age, health, and sum assured.
Fund Management Charges: The management cost for investing the funds in which your money goes-in usually ranges between 1 to 1.5% of the value of the fund.
Policy Administration Charges: A regular charge is used for maintaining the policy incurring the cost of services like record keeping and compliance.
Surrender Charges: In case one decides to surrender his or her policy before the lock-in period, then he or she will be levied for surrender charges.
Switching Charges: ULIPs entitle one to switch from one fund to another during the tenure of the policy. While some plans offer free switches, others charge after a limited number of free switches may be available.
Advantages and Disadvantages of ULIP
Like any other financial product, ULIPs also have certain pros and cons. Let us look at whether ULIP is good or bad for different types of investors.
Advantages of ULIP:
Dual Advantage: The twin advantage of life insurance cover with market-linked investment returns accrues to the policyholder as it is a two-in-one product.
Tax Benefits: You can claim a deduction under Section 80C of the Income Tax Act for up to ₹1.5 lakhs. Moreover, the maturity value is tax-free under Section 10(10D), subject to certain conditions.
Switching: You could switch over from equity to debt funds or vice versa, depending upon your risk appetite and prevailing market conditions, hence managing your portfolio with a lot of finesse.
Forcing Savings: The lock-in period ensures disciplined savings and is a good choice for long-term goals.
Disadvantages of ULIP:
High Charges: As touched upon earlier, the charges of ULIP on premium allocation, fund management, and mortality eat into your returns considerably, especially in the initial years.
Long Lock-In Period: ULIPs have a 5-year lock-in period, and if you need the money at any time before that, it would surely pose a hindrance to the liquidity aspect.
Complexity: ULIPs are more complicated than SIPs, which may deter first-time investors from exploring them.
Is ULIP a Good Investment?
Whether ULIP is good to invest in depends upon your financial goals, risk appetite, and need to balance between insurance and investment.
If you are a long-term investor, then ULIP will be advantageous in giving life insurance along with a long-term investment, factoring in tax savings.
Short-term investor: If you need liquidity or if your aim is purely returns on investment, then ULIP will not be a good choice since the charges are high and there is also a lock-in period. You can go ahead with SIPs in that case.
ULIP vs Mutual Fund
The basic differentiation, in essence, while comparing ULIP vs. Mutual Fund, is the fact that mutual funds are purely investment products while ULIPs extend the benefit of insurance on life as well.
ULIP: It offers life coverage, allowing deductions under both Section 80C and Section 10(10D). It includes certain charges and has a lock-in period.
Mutual Funds (SIP): Economical investment schemes with zero insurance coverage. One can easily invest in mutual funds through SIP. SIP has more liquid and flexible investments.
ULIP vs SIP: Which is Better?
When one decides on one of the two, which one is better-SIP or ULIP, here are a few takeaways:
The best case for SIP investment is when one is purely an investor and needs avenues for investment purposes only. Here, the charges are also less, and the net return in the long term is bigger due to fewer charges.
ULIP works best in cases where your requirement is dual-life insurance along with avenues of investment. Charges are higher in ULIPs, but they offer forced savings discipline and income tax benefits. These advantages can offset the higher fees for some investors.
ULIP Calculator
For being able to measure how much you will be able to earn through a ULIP scheme, you can access the ULIP calculators on the websites of insurance companies. The ULIP Calculator would give an idea about the return expected in ULIP from the investment by feeding data such as:
Premium amount
Policy tenure
Type of fund: equity, debt, or hybrid
Rate of return expected
These calculators come quite handy when one is planning to invest in different types of ULIPs and evaluate how well one’s investment would grow in due course of time.
Conclusion: How Far is ULIP Good or Bad?
In short, ULIP will be a good option for anyone who is looking for an investment product that can give insurance benefits along with tax savings. The fees associated with ULIPs and their complexity make them unsuitable for those wanting a pure investment vehicle with high liquidity and flexibility.
On the other hand, SIPs would allow for smooth, cost-efficient investment in mutual funds with greater flexibility. If life insurance isn’t your top priority and wealth creation is your goal, then SIP may be a better alternative.
The decision between ULIP and SIP should be based on an individual’s financial goals, investment horizon, and insurance needs. He must also estimate the returns using a ULIP calculator and keep all the advantages of ULIPs along with their disadvantages in mind before making a right decision.