ULIP vs SIP – Which is a better investment option?

Read on to know the difference between ULIP and SIP, and which is a better option for future investments.
Get Quote
ULIP vs SIP – Which is a better investment option?
Get Quote
3 mins
20-July-2023

When it comes to investing in India, Unit Linked Insurance Plans (ULIPs) and Systematic Investment Plans (SIPs) are among the most popular choices among investors. While both investment options have their advantages, they also come with their own unique features, costs, and benefits. In this article, we will explore the differences between ULIPs and SIPs and help you decide which is the better choice to help you achieve your investment and wealth creation goals.

ULIP vs SIP

Given below are the detailed advantages of ULIP and SIP for your reference:

Unit-Linked Insurance Plan

Systematic Investment Plans

Triple benefits: ULIPs are insurance cum investment products, where a certain portion of the premium you pay goes into providing life cover. In contrast, another part is invested in the markets to earn returns and build wealth. ULIPs offer triple advantage of life cover, wealth creation, and tax benefits.

The habit of disciplined savings: SIPs inculcate the habit of disciplined savings, essential for long-term wealth creation to address various goals. A certain amount is deducted from your account each month and invested on your behalf through the auto-debit facility.

Choosing the preferred asset class: ULIPs give you the benefit to choose your preferred asset class based on your risk appetite. If you are an aggressive investor, you can select equities. On the other hand, if you are a moderate investor, you can choose debt funds. You can switch between funds within the ULIP.

Start with a small amount: The beauty of SIP is that you can start with a small amount, as low as Rs. 100. With time, as your income increases, you can increase the amount accordingly to build the desired corpus. When you stay invested for an extended period, you gain from the power of compounding. Assuming returns of 12%, a monthly investment of Rs. 1,000 for 10 years would grow above Rs. 2 lakh.

Partial withdrawals: ULIPs allow you to make partial withdrawals after the mandatory 5-year lock-in period. You can withdraw an amount as per your needs and goals. Though there aren’t any rules on the amount you start to withdraw, make sure you don’t withdraw huge sums, which might lead to policy termination.

Protect against market volatility: Since SIPs spread your investments over a long period, it protects your corpus from a significant dip when the market turns sour. A drop in the corpus can affect your financial goals.


Factors to consider when choosing ULIP or SIP

  • Returns on investment: The returns on investment play a critical role in determining the best investment strategy between ULIP and SIP. ULIPs, being market-linked investments, have the potential to provide higher returns based on market performance. However, the returns are not guaranteed, and the risk associated with ULIPs may be higher when compared to SIPs. SIPs are more stable with predictable returns, although they may not provide rapid wealth creation like ULIPs.
  • Liquidity: Liquidity is another important factor to consider when choosing between ULIP and SIP. ULIPs have minimum lock-in periods of 5 years, making it difficult to access funds in case of emergency. Some of the partial withdrawals are possible for meeting emergencies and higher education needs of the policyholder for children. During the lock-in period, if you make any partial withdrawals, the sum assured automatically reduces to the extent of the withdrawal. Conversely, SIPs are liquid and do not have a lock-in period. Investors can withdraw their funds, partly or entirely, anytime they require.
  • Flexibility: While SIPs are flexible in terms of the amount invested or discontinued, ULIPs offer flexibility in terms of switching your allocation between equity, debt, or hybrid funds depending on your risk appetite and market conditions. Some ULIPs also offer riders such as accidental death, disability, hospitalisation, and so on for a comprehensive protection plan.
  • Costs: The costs charged for ULIPs and SIPs are vastly different. ULIPs come with a variety of charges like mortality charges, premium allocation charges, administration charges, and fund management charges that eat away at the corpus, which could have been invested for returns. SIPs, on the other hand, have no charges except the expense ratio, which varies depending on the management fee.

In conclusion, choosing between ULIP and SIP depends on individual investment needs, goals, and risk appetite. A decision to invest in any of these options should revolve around comparing the returns of both options, liquidity, costs, and flexibility. Although a number of charges associated with ULIPs that can erode the corpus before yielding returns or insurance benefits, it caters to both investment and insurance – making it a comprehensive option for investors.

Similarly, SIPs are the preferred mode of investment for low-risk takers as they do not require lock-in or high charges. It is essential to consider all the features and evaluate risk and return potential before investing in either of these options. A judicious mix of both ULIP and SIP can also spread the risk across the portfolio items. It is advisable to seek the advice of a financial advisor before investing in any equity-linked product.

Disclaimer

Insurance is the subject matter of solicitation. *T&C Apply - Bajaj Finance Limited (‘BFL’) is a registered corporate agent of third party insurance products of Bajaj Allianz Life Insurance Company Limited, HDFC Life Insurance Company Limited, Future Generali Life Insurance Company Limited, Bajaj Allianz General Insurance Company Limited, SBI General Insurance Company Limited, ACKO General Insurance Limited, ICICI Lombard General Insurance Company Limited, HDFC ERGO General Insurance Company Limited, Tata AIG General Insurance Company Limited, Niva Bupa Health Insurance Company Limited , Aditya Birla Health Insurance Company Limited, Manipal Cigna Health Insurance Company Limited and Care Health Insurance Company Limited under the IRDAI composite CA registration number CA0101. Please note that, BFL does not underwrite the risk or act as an insurer. Your purchase of an insurance product is purely on a voluntary basis after your exercise of an independent due diligence on the suitability, viability of any insurance product. Any decision to purchase insurance product is solely at your own risk and responsibility and BFL shall not be liable for any loss or damage that any person may suffer, whether directly or indirectly. Please refer insurer's website for Policy Wordings. For more details on risk factors, terms and conditions and exclusions please read the product sales brochure carefully before concluding a sale. Tax benefits applicable if any, will be as per the prevailing tax laws. Tax laws are subject to change. Tax laws are subject to change. BFL does NOT provide Tax/Investment advisory services. Please consult your advisors before proceeding to purchase an insurance product. Visitors are hereby informed that their information submitted on the website may also be shared with insurers. BFL is also a distributor of other third party products from Assistance Services providers such as CPP Assistance Services Pvt. Ltd., Bajaj Finserv Health Ltd. etc. All product information such as premium, benefits, exclusions, sum insured, value added services, etc. are authentic and solely based on the information received from the respective insurance company or the respective Assistance service provider company.

Note – While we have made all efforts and taken utmost care in gathering precise information about the products, features, benefits, etc. However, BFL cannot be held liable for any direct or indirect damage/loss. We request our customers to conduct their research about these products and refer to the respective product’s sales brochures before concluding their sale.