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Comparing Equity Linked Saving Scheme With Unit Linked Insurance Policies

Which One Is Better – ULIP Vs ELSS

A ULIP stands for a unit-linked insurance plan, while an ELSS stands for an equity-linked savings scheme. Both of these monetary instruments are profitable investment options. However, deciding on the best one will largely be determined by your financial objectives. Below is a detailed distinction between the two to help you understand.

What are ULIPs?

ULIPs, or Unit Linked Insurance Plans, are a form of insurance that serves as both an investment and a savings vehicle. That is, a portion of the premium will be invested in funds, while the rest will be used to provide life insurance. The policyholder can choose from a variety of funds to invest in, including equity, debt, hybrid, and money market funds. A ULIP is usually a long-term investment with a 5-year mandatory lock-in duration. You have the right to transfer funds based on your investment goal and plan. In addition, the Income Tax Act of 1961 allows you to seek tax deductions for up to Rs.150,000 in ULIP premiums.

What is an ELSS?

The Equity Linked Savings Scheme, or ELSS, is a tax-advantaged diversified equity fund that invests the entire amount in capital markets and equity-related instruments. They have a tax-saving and wealth-building advantage in one package. In contrast to other monetary instruments and funds, ELSS mutual funds have the shortest lock-in duration of 3 years. In addition, under Section 80C of the Income Tax Act of 1961, you can receive tax benefits of up to Rs.150,000.

Why Invest in ULIPs?

Premium payment versatility is provided by ULIPs where you can switch the money back and forth between equity and debt funds. ULIPs allow you to take out a portion of your money as required and depending on your risk tolerance, you can also choose where to invest. Aside from these advantages, ULIPs have tax advantages on both the premiums charged and the returns earned at the end of the scheme.

  • Higher Returns

New generation ULIPs are less costly than conventional ULIPs, and some of them even outperform mutual funds in terms of returns. A ULIP helps an investor to convert between equity, debt, and hybrid investment funds. You can choose an investment style based on your risk tolerance. If you’re looking for a high-risk investment, equities are a good option. You can also choose debt funds if your risk appetite is poor. In the case of risk-aversion and mixed balanced funds, the same is true. You can also switch the whole fund and revise your investment portfolio if you are unhappy with the fund’s results.

  • Life Cover

One of the best types of funds that any investor can keep in their portfolio is investment combined with life insurance. If not for yourself, life insurance is essential for your spouse and children. Under ULIPs, this is protected. Thus, in the event of your death or in your absence, life insurance and investment will assist your family in avoiding financial hardship. The amount guaranteed can be used to cover a variety of expenditures, including medical bills, tuition costs, loan repayment, and so on.

  • Long-term Growth

Since ULIPs have a long investment period of 10-15 years, you have the opportunity to benefit from long-term growth. Long-term investing has the advantage of keeping your money in the market for a longer period of time, resulting in higher market-linked returns.

  • Tax Benefits

According to Section 80C of the Income Tax Act of 1961, premiums charged to a ULIP scheme are tax deductible.

Why Invest in ELSS?

  • Tax Benefit

The primary motivation for investing in an ELSS is to take advantage of tax incentives of up to Rs.150,000 under Section 80C of the Income Tax Act of 1961.

  • Lock-in Period

In contrast to other financial instruments, ELSS funds have the shortest lock-in duration (3 years). This is a decent investment opportunity if you want to gain good returns over a three-year term.

  • Growth Potential

Not only can these funds have better returns, but you also have the option of staying invested after the mandated three-year lock-in period has passed.

Comparative Analysis between ULIP vs ELSS

Particulars Unit-Linked Insurance Plan Equity-Linked Savings Scheme
Lock-in period ULIPs have a mandatory lock-in of 5 years ELSS has a mandatory lock-in of 3 years
Tax benefits The invested amount offers tax deduction under Section 80C, but gains are taxable. LTCG under ELSS is taxed at 10% over and above Rs 1 lakh
Liquidity Funds can be available after the lock-in of 5 years subject to further policy conditions. Funds will be available after the lock-in of 3 years.

Wrapping Up – ULIP vs ELSS

You should check out the ULIPs of Bajaj Allianz Life Insurance available on Finserv MARKETS to invest in a ULIP policy as they enable you to customize the premium payment frequency and allow you to choose additional riders on your life insurance policy, such as the essential illness cover.