Difference between ULIP and SIP

SIP (Systematic Investment Plan) is a way people invest in mutual funds. SIPs allow the investors to make regular investments in any mutual fund. This ensures that there are regularity and discipline in the savings. When NAV (Net Asset Value) gets higher, the investor will get fewer units. When the NAV gets lower, the investor is likely to get a greater number of units. Over time this gets evened out.

ULIP (Unit Linked Insurance Plan) is a sort of financial product which offers the investor life insurance along with mutual fund investments. A section of the premium paid goes to make up for the assured sum, which is the amount that the life insurance policy entitles its policyholder to. The rest is invested towards the financial investments that the investor finds desirable, whether that is fixed-return, equity or an admixture of both. Investments made in the ULIP attract tax benefits under the section Section 80C of income tax law.

Now, let’s look at ULIP vs SIP through the following parameters:

Lock-In Period

As for ULIP, it has a mandatory lock-in period of about five years. If the investor does not continue paying the annual premium each year, upon the next year the charges get deducted from the amount that is already invested. So, make sure to follow through with the payment of premium towards ULIP policy. Moreover, there is going to be less income tax benefits if the investor chooses to either surrender or the policy before the tenure of five years.

Looking at ELSS, it has a mandatory lock-in the period that is three years long. Now, every investment that is made through SIP in any ELSS fund gets considered to be a fresh investment. It also gets a separate lock-in period that lasts till three years from the date of investment. In case of the investor having continued a three-year-long SIP in any ELSS fund, and wishes to stop the scheme and withdraw the whole amount, he or she would have to wait it out for three more years, which would mean a total of six years.

Tax Benefit

Income tax benefit will be granted under the Section 80C of income tax law, towards the premium paid for ULIPs by the investors. In this case, the premium has to be lesser than 10% of the entire sum assured, if the scheme is bought after that of 1st of April, 2012. For investment products purchased before that specific date, the premium may then be less than twenty percent of the assured sum. Premiums ought to be continued during the following years for the investor to avail of the tax benefit.

The matured amount derived from ULIP schemes will also become tax-free if the percentage criteria of premium areas above. Taxes need to be paid on the complete maturity amount if the criteria above do not match. The tax applicable, in that case, would be as per the investor’s tax slab.

If the policy is surrendered before the tenure of five years, the premium gets added to the amount paid earlier and is taxed likewise.

The ELSS funds are the only one of their kind where investors can be certain of their tax benefits. No tax reversals happen in case of the ELSS funds. Moreover, the investments made under ELSS fund schemes are tax-free in all stages, which is during the investment, gain in the capital as well as maturity. But the catch is that during the five year lock-in period, ULIP policy cannot be surrendered, whereas SIPs can be stopped anytime at all.


Speaking of charges towards fund management, ULIPs are pricier than the SIP. For the first few years, the charges for premium allocation tend to be very high. These charges keep getting reduced gradually as the year advances. Due to this reduction in the charges, the amount that is effectively invested slowly increases. This is the reason why ULIPs tend to maximize their returns if continued for a tenure lasting more than ten years. The investor also needs to consider the other charges like charges towards policy administration and more.

ELSS funds operating through SIP investments have their fund management charges decided concerning expense ratio. The expense ratio for any ELSS fund is generally in the range of 2%-3%. Investing directly into the mutual fund would further lower the expense ratio, ensuring better returns.

Option for Switching

ULIP schemes invest the premium accrued in diverse funds like equity, debt and more. Preferences towards these funds may change in time concerning your investment requirement. During the early stages, the risk appetite of the investor tends to be high enough for him or her to choose allocations of his or her assets to equity funds rather than bond funds. Upon growing older, the risk appetite of the investor decreases, hence he or she invests more in bonds and debts than in equity funds.

If we consider the scenario of SIP schemes performing through ELSS, there are no options for future switching of investment options. The investment must stay locked-in for at least three years. After that the money may be is withdrawn after the successful completion of the three years tenure, starting from the day of investment.


Both SIP & ULIP possess their own unique sets of advantages as well disadvantages.

For example, ULIP has the dual benefit of investments plus insurance. But if compared to SIP, the returns are not that much.

Term insurance premiums are much less when compared to a ULIP. So an alternative to ULIP can be to invest in SIP first, then buy a term insurance cover.

SIP’s catch is its provision for full liquidity, so that each penny invested in SIP may be redeemed at any time. ULIPs provide no liquidity for the initial five years.

ULIP tends to offer varying tax benefits as compared to SIP since SIP or mutual funds would not help the investors in saving their tax returns.

Leave a Reply