What are Unit Linked Insurance Plans or ULIPs?
ULIPs have two offerings in one plan – life insurance plan and market-linked investment. It is a type of financial product that gives you life insurance cover as well as allows you to invest in stock market, debt funds, among other avenues. How does this happen? The premium that you pay is divided. A part of it is for life insurance and the other portion is infused into equity, debt or other investment options[1]. You will also have a fund manager to look after your investments. ULIPs (Unit Linked Insurance Plan) can be a good investment to secure your family’s financial future and help you save up money for future big ticket purchases.
What Is Exchange Traded Funds or ETFs?
ETFs are a group of investments that can include stocks or bonds or commodities. They are traded on the stock market and are created to track the performance of indices such as Nifty or Sensex. ETFs are created by authorised participants (AP) or financial institutions who buy the underlying assets and create a fund from which shares are issued to investors. Shareholders own a part of the ETF but don’t own the assets in that fund. ETFs allow you to invest in several securities at once and comparatively have lower fees than other kinds of funds.
ULIPs Vs ETFs: The Key Differences
Both ULIP plans and ETFs are popular investment choices, each with its own advantages, disadvantages, and structures. By understanding ULIPs Vs ETFs' primary differences, you can choose the option that best suits your financial goals and risk tolerance.
The Added ‘Life Insurance’ Factor
Mainly, life insurance is an important distinction between ETFs and ULIPs. A ULIP provides financial security for the life assured 's dependents in case of any unforeseen event, with life insurance and market-linked investments working together. ETFs do not offer insurance coverage and are solely aimed at wealth creation.
Long Term Vs Short Term Commitment
ULIPs, with their lock-in period of five years, are avenues for long-term saving and help investors to adhere to financial goals. ETFs, on the other hand, are liquid and attend to short-term needs due to their zero lock-in period, allowing investors to buy/sell units whenever they want.
Transparency
ULIPs are well-structured financial products and because they offer both life insurance and investment. However, there may be less transparency when it comes to asset allocation and the underlying expenses that come with the plan. ETFs are entitled to report their holdings regularly which gives shareholders more insight into their functioning.
Investment Focus
ULIPs split your premium between life insurance coverage and market linked investment. They focus on providing financial protection against untimely demise with the added benefit of market-linked returns. ETFs, on the contrary, are focused on creating investment returns only.
Charges and Expenses
ULIPs have different types of charges like fund management charge , administrative fees, mortality charges, etc. These charges are deducted from the premium and fund value over the policy tenure . ETFs tend to have a low expense ratio and brokerage costs .
How to Pick the Right Option: ULIP or ETF?
The choice between ULIPs vs ETFs finally lies in your investment aim, risk level, and holding period. The following table will show you the key differences between ULIP and ETF, so that you can pick the right option for yourself:
| Feature | ULIP | ETF |
|---|
Purpose
| Balances life insurance coverage with market-linked returns
| Has only investment return as its goal
|
Lock-In Period
| 5 years
| No lock-in; can be sold at any time
|
Liquidity
| Temporarily limited during the lock-in period
| High liquidity and easy tradability
|
Tax Benefits
| Available for tax deductions under Section 80C
| Only equity ETFs offer tax exemption on long-term capital gains under Section 80C
|
Risk
| Market-linked with protection of insurance
| Completely market-dependent
|
When to Choose ULIPS:
- You want a plan that combines both life cover and the potential of wealth creation by market-linked returns
- You want to take advantage of the tax deduction for premium payment under Section 80C.
- You like to have a systematic long-term plan.
- You can get tax benefits on the premiums paid and the policy benefits recieved.
When to Choose ETFs
- You want a low-cost, investment-focused product.
- You like having high liquidity , with the facility of trading the ETFs anytime you want . However, liquidity can vary by ETF, so choosing actively traded ETFs is important.
- You are seeking a short- or medium-term return and can tolerate market swings.
ULIPs and ETFs have different benefits that will serve the individual investor depending on his or her investment. ETFs would suit investors seeking low-cost, broad-based market exposure, whereas ULIPs are useful to investors in search of insurance protection and long-term wealth accumulation .
By actually looking at your personal risk tolerance and investment objectives, you will be in a position to determine what product best fits your financial plan.
Whatever you invest in , ULIPs or ETFs, just ensure that you are making a well-informed decision that is suitable for you and your own personal circumstances and long-term financial aims.
Identifying Your Financial Goal
While there are many pros and cons to both these financial products, the ultimate decision will stem from your personal objective of availing these investment options. To answer what the difference between ULIPs and ETFs is, it depends on your priority.
Key Takeaways
- ULIPs offer life insurance protection with market-linked returns.
- ETFs only invest and do not provide any insurance protection to investors.
- ULIPs work for disciplined, long-term planning
- ETFs have no lock-in and offer liquidity for investors, and can redeem/buy any units they wish at any time.
- Understand the tax implications and charges involved in ULIPs and ETFs when comparing the two
- ULIPs are great for investors looking to enjoy life insurance coverage and save for the long term .
- ETFs are suitable for investors looking for low-cost, highly liquid products, and do not mind taking on some market risk for some returns in the short/medium term.
Conclusion
If you are trying to make up your mind between ULIP vs ETF, as to which is better, consider your financial goals, risk appetite, and tenure. ETFs are volatile, flexible, cost-effective, and easier to tap into market opportunities. ULIPs are a good fit for individuals who want to secure life insurance protection and grow their wealth with tax benefits.
Ensure that you can take a smart investment decision by carefully examining your needs, whether it is for securing your family’s future or increasing returns with liquidity.
Frequently Asked Questions
How does ULIP operate?
ULIPs give you an opportunity to grow your wealth as well as ensure risk cover for your family because of its dual offerings: life insurance and investment. They achieve this by splitting the premium between life insurance and diverting a portion of it to investments that you can choose. You will have the choice to opt for debt or equity funds or hybrid funds during your tenure of the plan[1].
Are ULIPs tax free?
Once the plan has matured, the proceedings that will be received by the policyholder are charged with 12.5% Long-term capital gains tax for high value ULIPs on capital gain amount. Policyholders shall be eligible for an exemption of its capital gains from high value ULIPs up to an amount of Rs 1.25 lakh as per Section 112A of the Act, subject to the satisfaction of conditions therein. However, if the proceedings have come in due to the death of the policyholder, then no tax will be charged.
Who should choose ULIPs?
Unit Linked Insurance Plan ULIPs can be an ideal choice for individuals that are seeking to save money for long-term goals. Their lock-in period can be a good way for those who are prone to spending money on short-term gains to save some money for the future. However, those looking for immediate liquidity may not find it in these plans.
What are the pros of ULIPs?
ULIPs are useful for those that want to save funds for big ticket purchases or big life events over a 10-year horizon. They help you save that money, however, the funds you invest in ULIPs are inaccessible until maturity (five-year lock in period). During the tenure of your plan, you have the freedom to switch between equity or debt or mix of both, depending on your requirements.
How to invest in ETF?
Trading for ETFs happens on stock exchanges where they are listed. Investors will need to set up a brokerage account as well as a demat account to buy or sell shares. Once the account is set up, the investor can view different ETFs, compare them and then choose to invest as per requirement.
Should you invest in ETF?
Due to its exposure to stock markets, ETFs dish out the benefits of liquidity and real-time settlement ETFs are also an easier way to trade as you can buy and sell at any time of the day. The added advantage is that you can have a diversified basket of securities rather than choosing a few select stocks.
What is the difference between ETF and Mutual Funds?
ETFs are mostly passively managed and have lower fees as compared to Mutual Funds, which are professionally managed investment portfolios and trade once in the day on the stock exchanges.
What are the risks of ULIPs?
ULIPs make investments in debt and equity securities both are exposed to market risks. Although ULIPs come with a dual option of life insurance and investment, the investment risk is borne by the investor.
What are the risks to investing in ETFs?
ETFs are less risky than individual stocks because they are diversified funds. Their investors also benefit from very low fees.
