SIP VS Term Insurance Plans: Understand the Difference?

Are you trying to find the balance between creating savings for the future and protecting your family's financial future? It's a common dilemma! 

SIPs compounding effect helps build wealth over a period of time. On the other hand, term insurance protects your family during hard times when you are not with them. 

But do you know the key difference between these two financial options? If not, this blog is for you! 

In this blog, we will explain the differences between SIP vs Term Insurance Plans to help you understand which one—or both— is the best option for you to invest in. 

What is SIP?

"Systematic Investment Plan" or SIP is an investment strategy in mutual funds. Here, the investor invests a specified sum of money into their preferred mutual fund scheme on a monthly, quarterly, or lump sum(one-time) basis. 

When a SIP is set up, the chosen amount is debited from the account every month on the selected date. Then, it is invested in the respective mutual fund scheme depending on the Net Asset Value (NAV) on that day. In return, the investor is allocated mutual fund units according to their investment. 

For instance, Vijay invests ₹1,000 in a mutual fund scheme every month for 5 years. The total amount invested is ₹60,000. Expecting 12% returns p.a., Vijay will have around ₹82,000 after 5 years, depending on market performance. If he keeps investing for 20 years, Vijay will have around nine lakhs. 

Disclaimer: SIPs are one of the best investment methods for creating wealth over time. However, it is worth remembering that SIP returns are not fixed and may vary according to market fluctuations. 

Types of SIP 

When planning for a Systematic Investment Plan (SIP), it's essential to understand the different types available. Below are some of the most common types of SIP:

Regular SIPs

• In regular SIPs, a fixed amount is invested at regular intervals, for instance, monthly or quarterly basis. 
• This is one of the simple and disciplined ways for one to grow their investment. Over time, constant contributions allow you to build a large fund without necessarily making large one-time deposits.

Top-up SIPs

• Also known as step-up SIPs, Top-Up SIPs allow the investor to add a lump sum amount over and above the usual investment. 
• For instance, Vijay started an ₹5,000 SIP. He chose a Top-Up SIP with an annual increase of ₹1,000. In the first year, he invested ₹5,000 per month. In the second year, his monthly contribution increases to ₹6,000, and so on. 
• This is perfect for those having good income sources or surplus funds lying idle for investment.

Flexible SIPs

• Flexible SIPs allow the investor to change the SIP amount and dates depending on the status of their finances at the time. 
• This is ideal for those with irregular income or who want to invest surplus funds. 

Perpetual SIPs

• Perpetual SIPs have no fixed time frame for investment and allow one to invest as long as they want. 
• Unlike the standard SIPs, where investment is usually made for a period of 1, 3 or even 5 years, this one allows you to withdraw your investment anytime as per your needs and without a timeline.

Features Of SIP 

SIP inflows touched an all-time high of ₹24,509 crore in Sep 2024. Below are some of the reasons why! 

1. Grow Your Wealth Over Time

One of the advantages of SIP is building a large capital over a long period of time with little amounts being put in regularly. This gradual process is ideal for the long-term growth of your savings.

2. Encourages Disciplined Investing

You start making regular investments with SIP. This helps you develop discipline with respect to finances as you do not miss any targets towards investments.

3. Harness the Power of Compounding

You earn interest on your investment, and this investment generates returns over time. This is known as compounding and is one of the benefits of investing in SIPs. It results in your investments growing at an exponential rate.

4. Take Advantage of Market Fluctuations

With SIP, you can invest in more units when they are available at a lower price and vice-versa through the rupee cost averaging factor. 

Benefits of SIP

Here's why you should consider investing in SIPs:

• Small Investments, Big Growth: You do not require a huge amount to begin with SIP investment. One can start with small amounts of money on a regular basis, hence making them suitable for young or inexperienced investors.
• Skip The SIP: SIPs are flexible investment methods! Read on to know how!
  

Imagine a scenario where you have started investing in a SIP on a monthly basis. However, due to certain conditions, you are unable to pay the amount for a specific month. In such a case, you can simply skip the SIP for that month without facing penalties. 

• Cancellation Flexibility: You can cancel the SIP and redeem the amount whenever you want. However, you’ll be charged “Exit Load.” 

Wondering what is  “Exit Load?” It is the cancellation fee charged by mutual funds companies if investors cancel their SIP within a specific timeframe. 

For instance, HDFC Mid Cap Opportunities Direct Plan Growth has an exit load of 1% if the SIP is redeemed within one year. If the investor cancels the SIP within 10 months of investing, the company will deduct 1% from the total amount. 

• Stress-Free Investing: SIPs get rid of the stress that one has to deal with at the end of market peaks and troughs. They equalise the costs over a given period and help to control the market slumps.
• Convenient and Automated: Take advantage of the Electronic Clearing System (ECS) to arrange for regular deposit of funds to your investment account directly from your bank without missing any payment.
• Emotion-Free Investing: SIPs prevent emotional decisions by ensuring consistent investments across all market phases, handled by experienced fund managers.

What is Term Insurance?

Term insurance is a life insurance policy designed to provide financial security for a limited period that usually ranges between 10 to 30 years. In the event that the policyholder dies while the policy is active, the insurance company provides the agreed-upon sum as a death benefit to the beneficiary. This benefit could assist with obligations such as debts, schooling, or even regular living expenditures.

Simplicity and low cost are the most valuable aspects of a term insurance policy since it covers only death risk without any provision for savings or investment.

Example: For instance, you buy a 20-year term insurance plan of a sum assured worth ₹50 lakh. If, unfortunately, death befalls you during this time, then your beneficiary will be entitled to a payment of ₹50 lakh towards their financial support.

Types of Term Insurance

Here are some common types of term insurance policies:

1. Level Term Insurance

Level Term Insurance is perhaps the most common of all. Here, the sum assured remains the same throughout the policy term and the premiums charged also remain constant.

2. Increasing Term Insurance

Under this policy, the sum assured increases periodically by a fixed percentage to counter the devaluation of money due to inflation. This aimed at better coverage with a higher cost of living. Premiums are rather higher than the standard level term insurance.

3. Decreasing Term Insurance

This type of policy is suitable for individuals who have loans or any financial commitment. Under this plan, the sum assured decreases within set limits with the decrease in debts, but the premium remains constant.

4. Term Insurance with Return of Premium (TROP)

This policy refunds all premiums paid if the policyholder survives the term, combining insurance with a savings component. These policies are typically more expensive than regular term insurance due to the refund feature.

5. Convertible Term Insurance

This empowers the policyholder to advance or upgrade their term plan to an endowment or whole life policy, as per the changing financial needs.

6. Whole Life Insurance

This means that the insured gets life coverage till the age of one hundred years, which implies that his or her dependents are guaranteed financial well-being for a very long time.

Features of a Term Insurance Plan

Here are some key features of term insurance plans –

1. Easy to Purchase

Term life insurance plans are easy, simple and convenient to purchase. Most providers have the option of online policy comparisons, which helps them buy the best-suited policy with minimal paperwork and a very short time frame.

2. Affordable Coverage

An important aspect that many people find appealing about term insurance coverage is its low cost. For low premium rates, you are able to secure a cover for a period ranging from 5 up to 30 years, which is very economical. 

3. Flexible Premium Payment Options

Policyholders can choose to pay premiums once a year, twice a year, every three months, or every month so they can adjust it to their financial preferences.

4. Return of Premium Option

Some term plans have a return of premium option where all premiums paid are returned in case the insured lives till the end of the policy term.

Benefits of Term Insurance

Let's understand some major benefits of term insurance plans –

1. Flexible Payout Options

Term insurance provides flexibility with payout options, allowing beneficiaries to choose between a lump sum or monthly income. This ensures they can plan their financial future based on immediate and long-term needs.

2. High Coverage at Low Premium

With minimal financial input, term insurance is able to offer great payment plans, thus enabling individuals to tackle financial liabilities.

3. Disability Support

In case of a disability, some term insurance plans waive the premiums, ensuring that your family remains financially secure even if you can't continue payments.

4. Additional Riders

The policyholder can add such riders as critical illness, waiver of premium, or accidental death benefit to increase coverage.

5. Flexible Payment Modes

You can choose the frequency of premium payments—monthly, quarterly, or annually—depending on your financial situation.

6. Tax Benefits

As per section 80C of the Income Tax Act, premium payments made on term insurance policies are eligible for tax rebates, making it a wise tax-saving investment.

Key Difference Between SIPs and Term Insurance Plans

Here are the key differences between SIPs and term insurance plans —

Can SIP and Term Insurance be Complementary?

SIP and term insurance can definitely be complementary!  Here’s how! 

Some mutual fund companies like ICICI Prudential Mutual Fund,  Aditya Birla Sun Life, and Nippon India offer investment benefits along with life insurance coverage.

For instance, Aditya Birla Sun Life Century SIP offers dual benefits, i.e., one can

• Invest every month in the SIP and build a corpus. 
• Buy life insurance coverage at no extra charge. It covers accidental death for the initial 45 days from the policy's inception. Plus, the insured amount and fund value will be provided in case of the policyholder’s death. 

In short, the investor will have the advantages of investing and the comfort of knowing that their family is safe at the same time.

Tax Benefits: SIP vs Term Insurance

Let's understand the tax benefits under both SIP and term insurance –-

SIP (Systematic Investment Plan)

SIP plans allow you to save taxes while at the same time growing your wealth. If you choose to invest in an Equity Linked Savings Scheme through the SIP, you can apply for a tax deduction for up to ₹1.5 lakh as per the Income Tax Act, 1961, Section 80C. 

Term Insurance

Term insurance also provides attractive tax benefits. 

Section 80C

Premiums paid for term plans are deducted from the taxable income under Section 80C up to ₹1.5 lakh. For example, let us consider Ramesh, who pays premiums of ₹50,000 and is placed in the 20% tax bracket. In this case, his tax will be reduced by ₹10,000. 

Section 80D

Under Section 80D, deductions up to ₹25,000 per year are allowed for health riders attached with term policies. 

Section 10(10D) 

Payouts under Section 10(10D) (like maturity or death benefits) are generally tax-free as long as the premium does not exceed 10% of the sum assured.

Both SIPs and term insurance have advantages in terms of tax benefits, but the former invests your money towards creating wealth, and the latter is primarily designed to secure your family's finances.

Conclusion

To summarise, both SIP and term life insurance are essential components of your financial plan. While term insurance protects the family from risks, SIPs are a great option for wealth creation. 

Understanding the key details of both can significantly help you make a firm decision around choosing the right one and secure your and your family's financial future!

Frequently Asked Questions

Ques 1. What is a Systematic Investment Plan - SIP?

Ans. A Systematic Investment Plan (SIP) is a method of investing a fixed amount of money regularly in a mutual fund scheme. 

Ques 2. How does term life insurance function? 

Ans. A term insurance policy offers life cover for a certain period. If the insured dies within this time frame, the beneficiaries will receive a predetermined sum assured. 

Ques 3. What is the main objective of SIPs and term insurance?

Ans. While SIPs are used to accumulate wealth over a longer duration, the purpose of term insurance policies is to financially safeguard dependents upon the demise of the insured.

Ques 4. Can SIPs and term insurance be purchased together?

Ans. Yes, some SIPs, such as the Aditya Birla Sun Life Century SIP, provide life insurance coverage so that one can invest and protect one's family at the same time.

Ques 5. What are the advantages of investing in SIPs?

Ans. Some of the benefits of SIPs include high expected returns, the discipline of regular savings and the compounding effect, which enables a person to build wealth over the years.