While we talk about ULIP vs ELSS, there is nothing common between these two except they both are tax saving investment options. On one hand, where Unit Linked Insurance Plans are a mix of investment and life insurance offered by the life insurance companies, on the other hand, ELSS is known as an equity fund. The cost of ELSS is predictable and they have understandable returns and are transparent in nature, but with ULIPs it is not true. Therefore, both of these are different products and are there to serve different purposes.
However, before discussing much ULIP vs ELSS, let us take a quick look at the ULIP and ELSS separately.
Unit Linked Insurance Plan or ULIP is the product that is offered by the insurance companies. It gives the dual benefit of insurance and investment. A part of the premium that you pay for ULIP is allocated in a way that it goes to different funds to serve various investment purposes. While it’s another part is kept for fulfilling the purpose of your life insurance. Apart from this, ULIPs also offer death benefits as well.
In addition to this, you can enjoy the advantage of fund switching in ULIPs such as you can switch among the Debt Fund, Equity Fund, Money Market Fund, and Hybrid Fund. However, switching can be chargeable, but most of the insurance providers give some free switches as well.
The ULIPs have a lock-in period of five years, therefore, your money is locked for this period and there is no option to surrender. However, if you fail to pay the premiums during this period or want to surrender the policy, then also you will be eligible to get the payout after completing five years.
So, if you are looking for a long term investment option with the benefits of investment and tax, then ULIP is the best option for you when you compare it with ELSS or go for ULIP vs ELSS.
What is ELSS?
Equity Linked Savings Scheme is more commonly known as ELSS. It is an investment option that facilitates you to invest in equity markets and allows you to save taxes on both the investment that you have made and the returns that are generated through these investments.
The best part of investing in ELSS is that it has great potential to give huge returns because the entire principal amount is invested in equity-related funds and equities, however being market linked amount of money invested and its return are not guaranteed. Since market returns are highly volatile, this makes ELSS suitable for you if you are a high-risk tolerant investor. However, investing in ELSS always gives you an option to invest in SIPs. SIP or Systematic Investment Plan helps you to evaluate the averaging of rupee cost. Moreover, SIP allows you to get the benefits from both fall and rise of the capital market.
The lock-in period of ELSS is three years and is one of the shortest spans as your tax-saving investment under section 80C of the Income Tax Act, 1961. If you opt for the SIP, then your money gets locked for three long years from the date of your investment. In this way, you can redeem the invested unit only after three years are completed.
Any investment in ELSS that is up to Rs.1, 50, 000 is tax-free under section 80C of the Income Tax Act, 1961.
After understanding the basic meaning of ULIP and ELSS, let us now know the differences between these two i.e. ULIP vs ELSS:
Difference between ULIP and ELSS
Tax Saving Treatment
Both ULIP and ELSS are eligible for the tax deduction of up to Rs.1. 5 Lakhs as per Section 80C of the Income Tax Act, 1961. The ELSS follows the EEE investment mode. In this mode, the capital gains, maturity amount, and investments are tax-free. The reason for the same is the locking period of three years that results in a long-term capital gain. Whereas in ULIPs, if you surrender your money before the lock-in period, then all the deductions that are claimed earlier are revised and you have to pay the taxes. The maturity amount is tax-free only when the policyholder dies.
Rates and Transparency
The ELSS funds have one charge only, which is the expense ratio or fees of the fund management. This is approximately 3% and is adjusted in the scheme’s NAV and hence is not charged separately. In this way, you know the amount of money invested and you can easily calculate the returns. Therefore, ELSS is highly transparent. While in ULIP, approximately 60% of charges incurred in the first few years only. This includes charges of the premium allocation, fund switching charge, mortality charge, and deduction of the service tax. Whereas the rest of the money is invested in the investment market. Since the charges get reduced after three to four years, the return becomes very low. However, for getting good returns, you need to keep investing for at least ten to fifteen years. Even though, the transparency is a little less in ULIP as you do not know the actual amount that is invested. Some of the charges are waived off by deducting the units, but not reducing it from the NAV, in this way, reducing the transparency.
Option to Switch
When we go for ULIP vs ELSS on the ground of switching, the ULIPs offer option to switch. This means you can always alter the investment amount’s ratio in various funds. This enables you to shift the funds according to the risk exposure at different stages of life. However, there is a limit on free switches, so keep this number in mind while switching the funds in ULIP. Whereas, there is no option to switch funds in ELSS.
To compare ULIP vs ELSS in terms of lock-in period, ELSS has a lock-in period of three years, whereas ULIPs have five years lock-in period. While there is no option to quit ULIP, however, you can always discontinue the premium. However, the charge for discontinuing levied and the remaining amount is sent to discontinuation fund. Since you cannot withdraw invested amount before three years in ELSS, there is no exit load.
Comparative Analysis of ULIP and ELSS
|Definition||It is a pure investment option.||It is investment cum insurance product.|
|Lock-In Period||3 years||5 years|
|Objective||A fund that provides advantages through different equity investments.||An investment option that gives the leverage of investment and insurance.|
|Switching||No option to switch.||Switching is allowed among the funds.|
|Tax Implication||Investments are non-taxable under section 80C of the Income Tax Act.||Investments are exempted under section 80C and returns are exempted under section 10D of the Income Tax Act.|
|Transparency||Full details about the stocks are given.||Lacks in the transparency of fund.|
|Loyalty Additions||No loyalty additions are applicable.||The loyalty additions are applicable to the investments that stay invested throughout the policy term.|
|Risk||High risk, however, the return depends upon the fund manager and broader markets.||High-risk investment product wherein return and capital is not guaranteed, however, life cover is guaranteed.|
Summing it Up!
Even though ELSS is the first choice of the investors as it gives higher returns by investing your money for comparatively shorter term. However, ULIP is better for those who want to shift their investment among different funds, if a scheme is non-performing.
In this way, it is up to you to decide which investment option you want. The best way to do the same is to keep the comparison chart of ULIP vs ELSS in mind. Depending upon your investment objective and financial goal in mind, you can always finalize which option is the best for you. ULIP can be your choice if you have long term goals which are related to your family and personal financial security.
So, it is entirely your choice to decide which investment option you want as both the above mentioned products have their own pros and cons when we do comparative analysis of ULIP vs ELSS.