ULIPs vs ETFs: Choosing The Right Investment For Your Financial Needs

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What are Unit Linked Insurance Plans or ULIPs?

ULIPs have two offerings in one plan – life insurance plan and market-linked investment. It is a type of financial product that gives you life insurance cover as well as allows you to invest in stock market, debt funds, among other avenues. How does this happen? The premium that you pay is divided. A part of it is for life insurance and the other portion is infused into equity, debt or other investment options^[1]. You will also have a fund manager to look after your investments. ULIPs Unit Linked Insurance Plan can be a good investment to secure your family’s financial future and help you save up money for future big ticket purchases^[1].

What Are Exchange Traded Funds or ETFs?

ETFs are a group of investments that can include stocks or bonds or commodities. They are traded on the stock market and are created to track the performance of indices such as Nifty or Sensex^[2]. ETFs are created by authorised participants (AP) or financial institutions^[9] who buy the underlying assets and create a fund from which shares are issued to investors. Shareholders own a part of the ETF but don’t own the assets in that fund^[3]. ETFs allow you to invest in several securities at once and comparatively have lower fees than other kinds of funds^[3].

ULIPs Vs ETFs: The Key Differences

The Added ‘Life Insurance’ Opportunity

One key factor in the ULIPs vs ETFs debate is life insurance. ULIPs offer life insurance along with market-linked investment options while ETFs are only focussed on growing wealth^[1].

Also, for ULIPs, in case of demise of the life assured, the proceedings will be facilitated to the nominees that you picked as a part of your plan.

Long Term Vs Short Term Commitment

ULIP offers both life insurance and market-linked investment and hence, there is a lock-in period of 5 years. This can be useful for individuals who may want to save money for long-term gains and not spend it on short term goals^[4]. In contrast, there isn’t a lock-in period for ETFs⁸. In ULIPs vs ETFs, ETFs let the investors trade volatility or get exposure to a specific investing strategy - such as currency carry or covered call writing^[3]. This can be ideal for individuals looking for more flexibility to ensure access to money for urgent contingency requirements.

Transparency

ULIPs are well structured financial products and because they offer both life insurance and investment^[5]. However, there may be less transparency when it comes to asset allocation and the underlying expenses that come with the plan. ETFs are entitled to report their holdings regularly which gives shareholders more insight into their functioning^[3].

Identifying Your Financial Goal

While there are many pros and cons to both these financial products, the ultimate decision will stem from your personal objective of availing these investment options. To answer what the difference between ULIPs and ETFs is, it depends on your priority.

Frequently Asked Questions

01. How does ULIP operate?

ULIPs give you an opportunity to grow your wealth as well as ensure risk cover for your family because of its dual offerings: life insurance and investment. They achieve this by splitting the premium between life insurance and diverting a portion of it to investments that you can choose. You will have the choice to opt for debt or equity funds or hybrid funds during your tenure of the plan^[1].

02. Are ULIPs tax free?

Once the plan has matured, the proceedings that will be received by the policyholder are charged with 12.5% Long-term capital gains tax for high value ULIPs on capital gain amount. Policyholders shall be eligible for an exemption of its capital gains from high value ULIPs upto an amount of Rs 1.25 lakh as per Section 112A of the Act, subject to the satisfaction of conditions therein. However, if the proceedings have come in due to the death of the policyholder, then no tax will be charged.

03. Who should choose ULIPs?

Unit Linked Insurance Plan ULIPs can be an ideal choice for individuals that are seeking to save money for long-term goals. Their lock-in period can be a good way for those who are prone to spending money on short-term gains to save some money for the future. However, those looking for immediate liquidity may not find it in these plans^[4].

04. What are the pros of ULIPs?

ULIPs are useful for those that want to save funds for big ticket purchases or big life events over a 10-year horizon. They help you save that money, however, the funds you invest in ULIPs are inaccessible until maturity (five-year lock in period). During the tenure of your plan, you have the freedom to switch between equity or debt or mix of both, depending on your requirements^[1].

05. How to invest in ETF?

Trading for ETFs happens on stock exchanges where they are listed. Investors will need to set up a brokerage account as well as a demat account to buy or sell shares. Once the account is set up, the investor can view different ETFs, compare them and then choose to invest as per requirement^[3].

06. Should you invest in ETF?

Due to its exposure to stock markets, ETFs dish out the benefits of liquidity and real-time settlement^[3] ETFs are also an easier way to trade as you can buy and sell at any time of the day. The added advantage is that you can have a diversified basket of securities rather than choosing a few select stocks.

07. What is the difference between ETF and Mutual Funds?

ETFs are mostly passively managed and have lower fees as compared to Mutual Funds, which are professionally managed investment portfolios and trade once in the day on the stock exchanges^[6].

08. What are the risks of ULIPs?

ULIPs make investments in debt and equity securities both are exposed to market risks. Although ULIPs come with a dual option of life insurance and investment, the investment risk is borne by the investor.