Life Insurance - How Ulips differ from ELSS



The two are often confused because both are tax-saving instruments

Ulip vs ELSS

Ulip is an insurance-cum-investment product sold by insurers. Investors have the option to invest in equity , debt, hybrid and money market funds. The minimum sum assured is 10 times the annual premium (seven if age of entry is above 45). ELSS, or equity-linked saving schemes, are diversified equity funds that invest in stocks. These are pure investment instruments and don’t offer any insurance. The confusion between the two is probably because both make investments in equity markets and are tax-saving instruments.

Charges & transparency

ELSS funds have only one charge, which is the fund management fee or expense ratio. This is around 3% and the cost is adjusted in the NAV , not charged separately. This means that you know exactly how much amount was invested and can calculate your return.

In Ulips, 60% of charges are incurred in the first few years, including the premium allocation charge; mortality charge; fund management fee; policy administration charge; fund switching charge and service tax deduction. The remaining money is invested in the market. As the charges start reducing only after 3-4 years, the investment and returns will be very low. For good returns, you need to stay invested for 10-15 years.Transparency is low since you do not know the exact amount being invested.Some charges are levied by reducing the units, not deducting from NAV .

Tax treatment

Both instruments are eligible for deduction of up to `1.5 lakh under Sec 80C.ELSS follows the EEE mode--investment, capital gains and maturity amount are tax-free.

As for Ulips, if you surrender before the lock-in period, any deduction claimed earlier is reversed and you have to pay tax. The maturity amount is taxfree only on death of policyholder. If premium is more than 10% of sum assured, maturity proceeds are added to insured’s income and taxed. If the premium is more than 10% of sum assured and the proceeds for a year exceed `1 lakh, tax of 2% is deducted at source.

Lock-in period

Ulips have a lock-in period of five years, whereas in ELSS, your investment remains locked for three years. While you cannot quit Ulip, you can discontinue the premium, wherein a discontinuance charge is levied and the balance is moved to a discontinuation fund. In ELSS funds, no exit load is applicable.However, it is not advisable to quit a Ulip or an ELSS fund even after the lock-in period because equity investment gives the best returns in 7-10 years. In case of Ulips, this period is ideally 10-15 years.

Switching option

Ulips offer a switch option, which means that you can alter the ratio of invested amount in different funds. This allows you to shift funds as per the risk exposure at different life stages. In the case of ELSS, there is no such option and you can’t touch the investment before the lock-in period.

Source : The Economic Times back

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