Understanding The Differences Between ULIPs And ELSS

Understanding The Differences Between ULIPs And ELSS
Conclusion

ELSS has predictable expenses and returns, and they are transparent about how they operate and what they invest in. On the other hand, ULIPs aren't like that. Charges for life insurance (mortality charges), administration costs, and fund management fees are deducted from the premium paid by the insurer. As a result, just the monies that remain are invested. In the first year, ULIPs have high acquisition costs (including agency commissions). When measuring the return generated by a ULIP and thus comparing it to another investment, only the percentage of the premium that is invested in a fund must be considered. However, obtaining this information is tough.

A ULIP's combination of investing and insurance makes it difficult for savers to understand the cost-benefit of either component. Furthermore, your cash is safeguarded for a longer period of time. Transparency and liquidity are sacrificed as a result. In principle, ULIPs have a five-year lock-in period, but in practice, it's more like a ten-to-fifteen-year commitment because early termination affects returns. Because of their high costs, difficulty appraising them, lack of transparency, and inadequate liquidity, ULIPs are not a desirable investment instrument.

Understanding The Differences Between ULIPs And ELSS

Below are a few differences between ULIPs and ELSS:

Accountability And Fees

An ELSS fund's only cost is the fund management fee, often known as the expense ratio. This costs around 3% and is factored into the scheme's NAV rather than being charged separately. As a result, you'll be able to calculate your return and know exactly how much was invested, resulting in superior transaction transparency. In the first few years of ULIPs, the premium allocation charge (percentage of the premium for charges before allocating units, initial and renewal expenses, and agent commissions), the mortality charge (insurance cost), the fund management fee, the policy administration charge, the fund switching charge, and the service tax deduction all occur.

ELSS vs. ULIP

ULIP is an insurance-cumulative investment bundle sold by insurance companies. ULIP investors can choose from equity, debt, hybrid, and money market funds. The annual premium multiplied by 10 equals the minimum sum assured (seven times if the age of entry is above 45 years). On the other hand, ELSS, or equity-linked saving schemes, are diversified equity funds that invest in inequities. These are merely financial products that do not offer any type of protection. There is certainly some confusion between the two because they both participate in equity markets and are tax-saving vehicles. However, one must be clear about one's objectives and refrain from merging insurance with investment.

The Manner In Which Taxes Are Administered

On both instruments, Section 80C allows for a deduction of up to Rs 1.5 lakh. ELSS funds operate in the EEE mode, meaning that the investment, capital gains, and maturity amounts are all tax-free. This is because stock investments have a three-year lock-in period, which results in long-term capital gains that are tax-free. If you surrender ULIPs before the lock-in period ends, any past deductions will be reversed, and you will have to pay tax. The maturity amount is only tax-free when the policyholder dies. If the premium is larger than 10% of the total promised, the maturity funds are added to the insured's income and taxed at the corresponding rate. If the premium is more than 10% of the total assured and the proceeds for the year exceed Rs 1 lakh, a 2% tax is deducted at the source.

Lock-In Period

ULIPs have a five-year lock-in duration, whereas ELSS investments have a three-year lock-in period. While you cannot cancel the ULIP, you can stop paying the premium, in which case a discontinuance fee will be paid and the remaining balance will be transferred to a discontinuation fund. Because ELSS funds cannot be withdrawn before three years, there is no exit load. Exiting a ULIP or an ELSS fund after the lock-in period is not recommended because equity investments deliver the best long-term returns (7-10 years). In the case of ULIPs, this gap should be between 10-15 years.

Conclusion

ELSS funds provide both tax advantages and higher equity returns, making them a preferred investment option. If you also need life insurance, instead of a ULIP, you should buy pure term insurance.