Difference Between ULIP and ELSS & Which one is Better?

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 market performance. 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 premium paid. However, the gains are taxable as per the prevailing income tax laws.

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.