With the announcement of the Union Budget of 2018, insurance companies are busy highlighting ULIP Vs ELSS. Every average investor is muddled about this topic. The dilemma is whether to buy an insurance or invest in better options like ELSS.
To solve this, one must draw a distinction between insurance and investment. ELSS can help you meet your financial goals more coherently. We make an extensive comparison of both in this post. Check out the outcome of ULIP Vs ELSS, as money matters!
Are You Really Investing When Buying ULIP?
To better understand what you can do or what you should do when it comes to investments and returns, you must first understand the following terms:
Investment: This can be defined as an item or asset bought with the hope that it will appreciate over a period of time and generate income or profit. In other words, it is purchased keeping in mind that it will create wealth in the future.
Insurance: It is a contract recorded and documented in the form of a policy where an individual is assured a financial security or protection. The protection can be for an individual or can also be extended to the family of the insured.
Tax Saving: While choosing the best tax saving instrument, you must keep in mind the following:
- Percentage Tax Saved
- Tax on Returns
You must consider selecting only those instruments which are tax saver on both investment and returns.
Unlike Unit Linked Insurance Plans, ELSS (Equity Linked Saving Schemes) have huge potential to yield high returns. This is why they are considered peerless amongst all “Pure-Investment instruments”. Contrastingly, ULIPs are a mix of Insurance coverage and an investment opportunity. You might consider a ULIP Vs ELSS differentiation chart before deciding.
Tax Saving ULIPs Yield Poorly on Returns: Equally considered as tax saving tools, ULIP and ELSS are poles apart when invested in the market. In ULIP, insurance companies allocate a substantial amount of the premium paid by the customer to deductibles. The same is done to cover the life of the investor. Other deductibles are fund management fee, Policy Administration Charges, and agent commissions. Each of these gets deducted from the premium paid by the customer. The balance amount is then invested in markets like equity, debt, hybrid, and money funds.
Distinctively, ELSS is pure investment instruments and do not offer insurance. They have predictable costs, understandable ROI, and transparency. The information on how the funds operate and where the funds are invested are available to the customer.
What are ULIPs and What is ELSS?
ULIPs: Unit Linked Insurance Plans provided by various insurance companies are insurance-cum-investment products. The premium paid by the customer is used in the market and to cover his life. Usually, they offer a minimum sum assured equal to 10 times the annual premium. They are tax saving tools and enjoy tax benefits as per section 80C. ULIPs have a lock-in period of five years, which means an investor cannot withdraw money before five years of maturity. Even if the premiums are stopped or the investor decides to surrender the policy, the payout is released only after the lock-in tenure is completed.
ULIP offer death benefit to the investor. Hence, in the case of untimely death, the sum assured or the fund value is passed on to the nominee. The amount, whichever is higher, goes to the nominee irrespective of the number of premiums paid. For example, if three premiums are paid, each Rs.50000/-, and the market value at the time of death is Rs.170000/- the nominee gets Rs.500000/- (10 times the annual premium). If the market value is higher, the same is passed to the nominee.
ULIPs do not guarantee returns as they are market-linked products which are invested in equities. Charges which are incurred in the first year include:
- Premium allocation charges Maximum capping of 2.25%
- Policy Administration Charges
- Fund Management Fees Maximum 1.35%
- Mortality Charges Reduces year on year
- Fund Switching Charges Depends on individual policy
- Service tax deduction As per Government Rules
The investor can enjoy the benefit of switching funds and thus, he/she gets rewarded as a result of market churning. The profits are exempted from tax. But switching is chargeable and also the number of switching is capped.
ELSS: Equity Linked Saving Schemes are pure investment instruments that facilitate investors in equity markets. They save taxes as the investment is exempted under section 80C.
The complete funds are invested in equities or equity-related products and hence, the returns are highly volatile. They are therefore suggested to high-risk tolerant investors. To reduce the risk, an investor can choose the option of SIP (Systematic Investment Plan).
In SIP, the investor regularly invests a fixed amount in equity mutual fund schemes and puts an end to unpleasant market conditions. The funds are automatically invested in the scheme without your efforts. In addition, you get more units when the market is low and fewer units when the market is high. Consequently, the purchase cost is averaged and returns are maximized.
SIP is an investment tool where money starts compounding when investment is done for long periods. Resultantly, you get high returns on regular small investments. At times investors also prefer a ULIP Vs ELSS Vs SIP comparison.
Unlike ULIP, ELSS has a smaller lock-in period of three years. Switching is not allowed in ELSS and the funds can be withdrawn only after a period of three years.
Which is Better: ULIP Vs ELSS
When the question is an investment and long-term financial returns, not insurance, you must choose wisely. Thorough detailing of ULIP Vs ELSS must be done before finalizing. The following differentiation will help you decide.
(Unit Linked Insurance Plan)
(Equity Linked Saving Scheme)
|Intention||Insurance-cum-Investment||Pure Investment instrument|
|Purpose||Returns on long-term investment and life cover of the investor||High returns from diversified equity investments|
|Lock-in duration||Five years, irrespective of premium payment continuation surrender is not possible prior to lock-in||Three years|
|Taxation||Investment is exempted u/s 80C. The policy must be in force during the complete lock-in period, if not, all deductions claimed will be reversed and tax will be applicable. Tax on Returns is applicable when the annual premium is more than 10% of the sum assured.||Investment is exempted u/s 80C. Returns will be taxed @10% under the new long-term capital gains tax act.|
|Switching Funds||Allowed with the capping of number of switching and is chargeable||Not allowed, but SIP route can be followed after the lock-in|
|Transparency||Lacks transparency as you are unaware where the funds are invested||Transparent and complete details on funds, including the quantum of stocks held by funds are available|
|Risk||High risk, returns not guaranteed, but life cover is confirmed||High risk, high returns but not guaranteed|
Even after the introduction of the new LTCG tax, ELSS continues to be investor’s first choice because of its nature to generate higher returns. They offer better flexibility as they can be shifted to another fund in case the scheme is non-performing. The following illustration is evidence that ELSS can still yield high returns!
Keeping the ULIP Vs ELSS chart in mind, you must decide based on your financial goals and investment objectives. If the goal is a short-term or long-term investment with high growth potential through equity funds investment, ELSS is always a better option. Though, to reap maximum benefits and wealth creation, long-term investment is advisable. ULIP should opt when the objective is personal and family financial security for a long-term period of at least 10 – 15 years.
Conclusively, in the contest of ELSS Mutual Funds Vs ULIP, if it’s pure investment, then ELSS triumphs!
Disclaimer: the views expressed here are of the author and do not reflect those of Groww.