ULIP vs ELSS: A comparative analysis

In this article, we will have an in-depth look at the definition, features and difference between ULIP & ELSS, the two tax-saving options.

ULIP and ELSS usually are two tax-saving options available to investors. ULIP stands for unit-linked insurance plan, and ELSS is an equity-linked saving scheme. Both are lucrative forms of investment but choosing the right one can take time and effort. Investors must have a clear idea about each to make the right decision. In this article, we will explore ULIP vs ELSS. 

ULIP and ELSS are both monetary options with tax benefits under 80C of the Income Tax Act. Hence, confusion and comparison are usual. Investors must understand the similarities, differences, and advantages of ULIP and ELSS to make a sound decision.

To understand a suitable investment option, investors must know ULIP vs ELSS. Our discussion begins by understanding each of the ULIP and ELSS mutual funds

What is ULIP?

ULIP is a unique product that doubles as an investment and insurance product. A portion of your premium is invested in the equity market to earn returns. The remaining amount provides for insurance coverage. It gives investors a sense of security through insurance coverage while offering capital appreciation through investment. You can choose to invest in equity, debt, hybrid and money market funds according to your financial objectives and even switch capital according to your needs.

Things to know about ULIP

ULIP is unlike traditional investment plans because it offers insurance coverage and investment benefits. The following are the features of ULIP. 

  • ULIP is an insurance product, and offering life coverage to the insured is a critical feature of ULIP funds. 
  • At the beginning of the plan, the premium you pay is used for meeting policy expenses and coverage.
  • The premium is divided into an investment, used to buy units in mutual funds units, and insurance cover.
  • Investing in ULIP involves charges. The company collects fund management, administration, premium allocation, and mortality charges.

What is ELSS?

ELSS are equity-linked mutual funds that offer tax benefits from the investment. It allows investors to invest through SIP or a lump sum. These funds primarily invest in the capital market to buy company stocks of different market capitalisation. 

ELSS offers income tax benefits under 80C of the Income Tax Act and comes with a lock-in period of three years. Compared to ULIP, ELSS has generated an average return of 14-20% per year. 

Read More About What is ELSS Mutual Fund?

Features of ELSS 

  • Investors can invest any amount in ELSS funds. But tax exemption is available only for Rs 1.5 lakh per year. 
  • These products have a lock-in of three years. But investors can continue investing even after the lock-in period.
  • Compared to PF and fixed deposits, ELSS is a high-risk, high-return investment.
  • The returns generated are taxable as per the recent budget.
  • ELSS is suitable for individuals wanting to invest for a shorter lock-in and higher returns.

ULIP vs ELSS 

A comparative study of ULIP vs ELSS will help investors understand the similarities and differences between the two products, aiding decision-making.    

Product types and features 

The primary difference between the two products is in their product attributes. ELSS is a mutual fund investment which offers income tax saving benefits. But ULIP is more complex as it combines insurance and investment. ULIP is usually offered by insurance companies. The ULIP offers death benefits where the nominee receives the sum assured or the value of the units, whichever is higher. In the case of ELSS, only the value of the units is paid. 

Investment objective

The aims of both products are different. ELSS is a mutual fund scheme that aims to create wealth for investors through equity investment. It generates higher returns than ULIP funds. On the other hand, ULIP offers life insurance with some capital appreciation. ULIP is different from traditional life insurance products and combines insurance with investment. 

Risks 

ELSS is a high-risk product because it invests 60-80% of the fund in equities. ULIP is comparatively lower risk than ELSS because the sum insured is guaranteed in the policy even if the fund doesn’t generate good returns in the market. Investors in ULIP plans can pick funds according to their risk profile from debt, equity, or hybrid. Debt funds are low-risk, and investors can further switch funds according to the changing preferences during the policy’s tenure.     

Returns 

ELSS will invest primarily in equities. Hence, the returns generated by ELSS are higher than ULIP. 

ULIP, on the other hand, primarily invests in debt securities. Hence, the returns generated are slower but steady. The average return earned by a ULIP fund is 5-7%, whereas an ELSS fund will create a return of 12-14% for the same period. The primary objective of the ULIP fund is to offer life insurance to the policyholder. But ELSS invests purely for capital appreciation.   

Expense ratio

The expense ratio is another aspect of mutual fund investment. Equity mutual funds like ELSS usually have lower expense ratios of 1.35% to 2.5%, whereas charges for ULIP funds start from 2.25%. It is because ULIP funds have costs under several heads that include switching charges, agents’ commission, renewal expenses, premium allocation charges and others. ELSS only has management and exit charges. 

It is important to note that ELSS have predictable charges and returns, but ULIP products need more transparency regarding expenses vs benefits. The new-age ULIP funds are trying to become competitive like other investment products with low expense ratios and benefits like loyalty points, wealth boosters, and reduced premium allocation charges. 

Liquidity 

ELSS funds are more liquid than other tax-saving investment products. ELSS has a lock-in of three years which is lower than PF and ULIP. ULIP funds usually have a lock-in period of five years without the benefit of premature withdrawal. Most investors prefer to invest in ELSS funds because of the shorter lock-in tenure.

Switching options 

The benefits of ULIP include the switching option, which is absent in ELSS. Investors of ULIP policies benefit from switching their funds between debt, equity, or hybrid depending on market conditions and changing investment requirements. ELSS mutual funds are technically equity investments, with 60-80% of the fund being invested in company stocks. 

Taxation

ULIP and ELSS offer income tax benefits of Rs 1.5 lakh in a financial year per section 80c of the Income Tax Act. However, the returns are subject to taxation when investors redeem the units in ELSS and ULIP after their respective lock-in periods of three and five years. ELSS, an equity investment, is taxed as per capital gain tax laws, and returns from ULIP are taxed as per the government’s new norms under 8AD from February 1, 2021. 

Here is a comparison table of ULIP vs ELSS.

Criteria ULIP ELSS
Product type  It is a market-linked insurance product, which offers life coverage and capital appreciation through finance market investments.  A pure equity investment product.
Lock-in  5 years 3 years
Liquidity  After the lock in period. Partial withdrawal is allowed. After a lock-in period of three years. Partial withdrawal isn’t allowed. 
Taxation  Tax benefit under 80c upto Rs 1.5 lakh in a financial year. Tax on returns is added only if the premium is 10% of the sum assured. Tax benefit under 80c. Capital gain tax applied when return is over Rs 1,00,000. 
Returns  The returns generated are lower than ELSS. average return is 5-7%.  Return generated is usually high.
Risk ULIP is lower risk than ELSS which is purely equity investment. ELSS is moderate to high risk investment suitable for aggressive investors. 

Benefits of ULIP is insurance coverage, which ELSS lacks. Now that we have explained ULIP meaning, you can decide which is suitable for your financial goal.

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