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  • 5 reasons which explains why ULIPs are better than ELSS

    Published on January 24, 2019

    What is a ULIP plan?

    ULIP is way to securely invest the money through a combination of investment and insurance plan. The investor, or the policy holder, pays the premium amount as chargeable under the ULIP plan. Some part of this amount goes to secure life insurance while another part of it goes for the investment. Policyholder invests according to the term of the policy having 5 years as the minimum tenure and accumulates these payments which are later paid to the investor in terms of policy returns. Through a ULIP plan, an investor can invest into equity or debts depending upon the term of the plan. One with a longer term can go for equity investment while those with smaller term can go for investing in debts.

    What is ELSS?

    Being a type of equity funds, ELSS gives its investor a benefit of tax deduction at the time of making an investment deal. ELSS is also known as tax saving mutual fund schemes. Unlike other equity funds that do not have a lock-in period, the mutual funds involve a lock-in period of 3 years. Against all the monthly instalments that the investors pay, the ELSS is subject to the 3-year lock in period. If you subtract the deduction benefits and the lock-in period, the ELSS is just similar to the equity funds.

    5 reasons why ULIPs are better than ELSS

    ULIP vs ELSS

    Various insurance companies deal in ULIP plans which gifts the investors the benefits of investment cum insurance and makes the investments a secure deal. As an investor, one has the chance to invest in various products like equity, debt, hybrid and money market funds. While investing in a ULIP plan, the investor is assured to get 10 times of the premium amount as the return against the plan. While, on the other hand, ELSS are based on stock investments. Unlike the ULIP plan they do not offer any insurance for the investment. They are purely for the purpose of making an investment. Even though both are stock based investments, there is difference between the two.

    Transparency and charges involved

    Investing in ELSS does not involve a number of charges. The investment procedure only requires one charge that is known as management fee or the expense ratio. This charge estimates around 3% and is not charged on a separate term from the investor. This gives you an idea of the amount that you will get as the return against the investment and makes ELSS an option of investment with high transparency. On the other hand, ULIP returns are lower in this case as compared to ELSS form of investment. They involve 60% of charges including premium allocation charge, mortality charge, fund switching charge, service tax etc. These charges are deducted from the premium amount and the remaining money is further invested for the first 3-4 years which makes the returns to be lower in comparison to ELSS. To improve the amounts of returns, one has to stick to the plan for 10-15 years.

    Treatment of Tax

    When talking about treating tax in both of the forms of investment, both, ELSS and ULIP are capable to deduct Rs 1.5 lakhs. In the case of ELSS mode of investment, the investment, capital gains and maturity amount are tax-free for the reason that the investor is locked up in the deal for minimum of 3 years. While, in the case of ULIP plans, if you break the lock-in period, all your prior deductions are returned and you then you have to pay the amount of tax as payable. However, the maturity amount is tax free for the investor after the death of the policyholder.

    Lock–in period

    The two ways of investments differ in their terms when you talk about the lock-in periods involved in them. While ULIP plan requires the lock-in period of minimum 5 years, in case of ELSS investment, the lock-in period involved is, 3 years. Before the lock-in period, you cannot quit the ULIP plan but you can surely stop continuing the premium. For doing the same, you have to pay the charges for discontinuing the premium and the balance amount is then transferred to the discontinuance fund. However, in ELSS, the investor cannot withdraw before the lock-in period ends.  It is advisable not to break the investment before the lock-in period because the longer the lock-in period the better are the results. A ULIP plan holder is recommended to continue the investment for 10-15 years because that is when the results start to appear.

    Options for switching

    ULIP plans offer their investors the facility to switch the investment. That is, one can switch from equity to debt to hybrid whenever there is a need. However, it must be noted that the plans will only offer a few chances to switch the investments for free. You can opt for equity investments at a young age and you can switch the investment to debt at an older age. Or, there can be various reasons as well for the change to take place. You can also change your preference for the investment when there is a shift in the market circumstances. On comparative terms, if you talk about ELSS investment, the investors do not enjoy any such benefit of switching the investment. They have to stick with their initial choice till the lock-in period to end. However, to ensure booking of high returns, one can opt for dividends.

    Hence, in the race of ULIP vs ELSS we see the ULIP investment plans as a beneficial option.