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Ulip vs ELSS – Difference between ULIP and ELSS

Difference between ULIP and ELSS

In this article we will explore the difference between ULIP and ELSS. Understanding the difference between the two will help you decide which is better ULIP or ELSS.

1. Feature: The key difference between ULIP and ELSS is the nature of the product. Unit Linked Insurance Plans also known as ULIPs are sold by insurance companies. ULIPs give the benefit of investment coupled with insurance coverage. Part of the premium paid goes into different funds for investment purposes as the investor chooses and a part of the premium is used to pay for the life cover.

Being a life insurance policy, ULIPs offer death benefit, so if the insured dies during the tenure of the policy, the nominee is paid the higher of sum assured or fund value. ULIPs offer investors the option to choose between equity and debt funds depending on their risk appetite and their goals.

Equity Linked Savings Fund or ELSS refers to diversified equity mutual funds that do not have any insurance component.

Both ULIPs and ELSS thus make investments in the equity market.

2. Lock-in period: Another difference between ELSS and ULIP is in their lock-in period. ELSS funds have a lock-in period of 3 years but to get the most of these funds an investor should hold on to such funds for 7-10 years. ULIPs have a lock-in period of 5 years. However, to get the benefits of an ULIP an investor should ideally hold on to it for 10-15 years.

3. Tax benefits: Another factor to consider in the ULIP vs ELSS debate is the taxation of each product. Both ELSS and ULIP come with tax benefit u/s 80C. The premium paid towards a ULIP policy is allowed as a deduction u/s section 80C of Income Tax Act. You can deduct ULIP premiums from your total income up to a maximum of Rs 1.5 lakh.

To be eligible for this deduction, the premium paid should be less than 10 per cent of the sum assured under the ULIP. Death benefit paid under ULIP is completely tax free. On maturity of an ULIP the policy holder receives the sum assured or the value of unit linked investment whichever is higher. This pay-out is also exempt under section 10 (10D) of the Income Tax Act.

Similarly, investments in ELSS are also exempt up to Rs 1.5 lakh under section 80c. A tax of 10 per cent is applicable on long term capital gains exceeding Rs 1 lakh in a financial year.

4. Option to switch: ULIPs have a switching option which means the investor can alter how much of the funds are being allocated to equity debt and hybrid funds. This allows you to change the allocation of fund depending on your risk appetite. The number of free switches is however limited in a year. In case of ELSS switching is not allowed. This is another key difference between ULIP and ELSS.

5. Charges and transparency: When doing a ULIP vs ELSS comparison another thing to keep in mind are the charges associated with each.

ULIPs come with a host of charges which reduces the appeal of the product. The premium allocation charge charged at a higher rate during the initial years is deducted as a fixed percentage of the premium received. Since ULIPs also provide life cover, it also has a mortality charge which differs based on various factors like age, health and coverage amount. Some ULIPs return these charges on maturity. The policy administration charge is deducted towards the administrative expenses incurred by the company and usually levied on a monthly basis.

The fund management charges are the fee the insurance company charges to manage the various funds of an ULIP and is charged as a percentage of the value of assets. This charge is deducted before calculating the net asset value (NAV). Though this charge differs from fund to fund, IRDA has capped such charges to 1.35 per cent annually. Plus, an ULIP also has surrender and discontinuance charges. Most of these are front loaded charges and thus a bulk of it is charged in the first few years of the policy.

Since it is having a lock-in period of 3 years ELSS has got no exit load. The only fee levied on ELSS is the fund management fee. Sebi has capped this fee at 2.25 per cent.

Investors often ask the question which is better, ULIP or ELSS. In the ULIP vs ELSS question, ELSS has an edge for various reasons. Experts always recommend that one should not mix insurance and investment. Also, as we have seen ELSS products have an advantage in terms of charges, liquidity, transparency and the lock-in period. So ELSS is a better option than ULIPs for an investor.

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