What is the Difference Between ULIP and ELSS Plan?

What Is an ULIP?

What Is ELSS?

What Are the Differences Between ULIP and ELSS?

To decide whether ULIP or ELSS is a better investment choice for you, it is vital to know the differences between the two. Therefore, in the following table, we will draw a comparison between them.

Basis of Comparison

ULIP (Unity-Linked Insurance Plan)

ELSS (Equity-Linked Savings Scheme)

Investment Type

ULIPs are a combination of insurance and investments.

ELSS is purely an investment scheme. Therefore, they are a type of mutual fund scheme.

Objectives

They offer life coverage alone with investment returns and tax benefits.

On the other hand, ELSS are professionally managed mutual funds which offer the advantage of a diversified investment portfolio.

Returns

Returns associated with ULIP are variable since the investor can choose a combination of equity, debt or hybrid funds to invest.

Since ELSS are market-linked, the returns are dependent on the scheme. The approximate returns range from 12 – 14%.

Liquidity

ULIPs have low liquidity.

On the other hand, ELSS is high in liquidity. Meaning, they are easier to convert into cash than ULIPs.

Regulatory Bodies

ULIPs are regulated by the IRDA (Insurance Regulatory and Development Authority of India).

ELSS is regulated by SEBI (Securities and Exchange Board of India).

Lock-in Period

They have a lock-in period of 5 years. The investor may stop the premium payments, but the policy cannot be surrendered before the end of the lock-in period.

They have a lock-in period of 3 years.

Flexibility

In ULIPs, switching between different types of investments, such as equity, debt, balanced, hybrid funds, etc., is allowed. The number of switches per year and the costs associated depends upon the company.

In ELSS, the whole amount is invested in equity and equity-linked funds. Hence, switching is not allowed. The investor may do a transfer after the lock-in period is passed.

Risk Associated

ULIPs are high-risk investments. The returns are entirely dependent on the fund’s performance in the market. However, they offer live coverage.

ELSS funds are also high-risk investments where the returns depend upon the fund's market performance.

Transparency

They do not offer full transparency since it is difficult to determine where the money is being invested.

On the other hand, ELSS is very transparent. As a result, the investors receive complete insights into where their money is being invested.

Tax Implications

Under Section 80C of the Income Tax Act 1961, ULIPs are offered tax deductions on the principal amount. However, the gains are taxable.

ELSS investments are taxable as per Section 80C of the Income Tax Act 1961. A LTCG (Long-Term Capital Gains) tax of 10% is applicable to returns above ₹ 1 lakh.

Additional Charges

Multiple charges are applicable, such as premium allocation charges, mortality charges, policy administration charges, etc. They are capped at 2.25% for policies with tenures of 10 years or more and 3% for others.

Exit load and fund management charges are applicable. These depend upon the fund but are usually around 2%. Direct plans often have lower charges.

Loyalty Additions

Loyalty additions are offered if you remain invested throughout the policy's tenure. The benefits are given as per the terms and conditions of the plan.

On the other hand, loyalty additions are not applicable for ELSS.

ULIP vs ELSS: Examples of Taxation

FAQs About Difference Between ULIP and ELSS

Are dividends from ELSS subject to taxation? up-arrow

Yes, as per the new Union Budget 2020, dividends earned from all mutual fund schemes, including ELSS, are subject to taxation as per the investor's income tax slab. AMCs used to deduct DDT (Dividend Distribution Taxes) previously. That system has now been eliminated.

Are ULIPs a type of mutual fund? up-arrow

ULIPs are not a type of mutual fund. They are insurance plans which aim to provide life coverage to the policyholder. They additionally invest in financial instruments such as stocks and bonds to generate returns. On the other hand, the primary purpose of mutual funds is to increase wealth.

When is it a good time to invest in ULIPs? up-arrow

There is no specific right time to invest in ULIPs. It mainly depends upon the personal circumstances of the investor. However, ULIPs provide life coverage, as well as market-linked investments and are always a good investment decision.

What are the disadvantages of ULIP? up-arrow

Some of the disadvantages to consider before you opt for a ULIP include:

  • Higher premium charges
  • Your returns are subjected to market risks
  • the product and plan structure is much more complex than traditional insurance plans
  • There is low transparency of the portfolio holdings which may make it more difficult to understand the investment strategy of the company.

Which is more flexible, ELSS or ULIP? up-arrow

ELSS is more flexible, as the investor can choose to invest a lump sum or invest through SIPs (Systematic Investment Plans), and the investment amount can be increased or decreased. ULIP, on the other hand, has restrictions on premium payments and may have limited fund options.