While considering ULIPs & fixed deposits, investors compare growth & safety. Choosing the Best Savings Plan depends on whether an investor prefers long-term wealth or guaranteed returns. Both plans come with their own pros & cons, & the decision of choosing one between the two will depend on financial objectives, risk tolerance level, & investment horizon. Let us understand the two plans in detail.
What is ULIP?
ULIP is a type of life insurance which offers the dual benefit of insurance & investment. Under this plan, a part of the premium is allocated towards life insurance & the rest towards investment. One can opt to invest in debt, equity, or both, depending upon the financial objectives & risk acceptance level, making it an ideal investment option. It provides flexibility to switch between the funds anytime during the policy tenure.
In case of the death of a policyholder, the nominees will receive the return on investment or the amount of sum assured, whichever is higher. &, if the policyholder survives the policy, they will receive the fund value.
What are Fixed Deposits?
A fixed deposit is a type of savings plan issued by financial institutions or banks, where funds are deposited for a certain period of time ranging from a few days to several years. In return, banks pay investors the maturity amount along with a specified interest rate, which is normally higher than that on a savings plan. They are low-risk investments with guaranteed returns.
Difference between ULIPs & Fixed Deposits
Let us understand the difference between ULIPs & Fixed Deposits:
| Basis of Difference | ULIPs | Fixed Deposits |
| Life Insurance & Investment | ULIPs offer the dual benefit of life insurance & market-linked investments. | Fixed deposits do not offer life insurance coverage; rather, they provide stable returns. |
| Insurance Cover & Premium Factors | ULIPs provide life insurance coverage, but it should be at least 10 times the annual premium, keeping the maturity benefits exempt from taxes u/s 10(10D). | Life insurance coverage is not included. |
| Charge Structure | It includes multiple charges, such as fund management fees, premium allocation fees, partial withdrawal charges, surrender charges, partial withdrawal charges, etc. | It does not include considerate charges, i.e. it offers a straightforward fee structure. |
| Lock-in Period | It has a lock-in period of up to 3-5 years during which withdrawals are not allowed. | There is no lock-in period in fixed deposits, rather a fixed tenure, which provides an investor with higher liquidity. |
| Liquidity | ULIPs are not considered to be liquid because of their lock-in period. | They are considered to be more liquid in comparison to fixed deposits. This is because they allow withdrawals without any restrictions. |
| Taxation | The premium paid towards ULIP is eligible for a tax deduction of up to INR 1.5 lakhs per annum u/s 80C of the Income Tax Act, 1961. | The tax benefits under this plan depend on the deposit tenure & type of fixed deposit. |
| Expenses | It has quite expensive fees & charges. | It has lower fees & charges, which makes it a cost-effective plan. |
| Transparency | These are less transparent plans for the investors. | This plan provides all the details to the investors. |
| Fund Switching | This plan allows switching between the funds depending on the market situations & the choice of investors, hence offering flexibility. | This plan does not provide the option to switch between the funds. |
| Risks | As they are dependent on market situations, hence risky. | They are less risky as they are not linked to the market. |
Features & Benefits of Unit Linked Insurance Plan (ULIPs)
Provided below are the salient features & benefits of the ULIP Plan:
- ULIP has its dual benefits of insurance with investment, which allows wealth growth &financial security for family members.
- It provides life coverage to the policyholder’s nominees in case of the sudden demise of the policyholder, hence providing financial support to the family.
- The fees & charges are clearly disclosed, which helps in making informed decisions.
- It offers many fund options, such as equity for high growth &debt for stability, which fulfil all types of risk tolerances.
- It provides flexibility to adjust between the funds, allowing you to switch your investments as per the market conditions &your risk tolerance level.
- Get your funds withdrawn partially from your fund value after the lock-in period is completed to meet emergency situations.
- Get a tax deduction on the amount of premium paid u/s 80C, &the amount of proceeds to be received on maturity is exempt from tax u/s 10(10D).
Features & Benefits of Fixed Deposits (FDs)
Provided are the features & benefits of the Fixed Deposits:
- Fixed deposits offer guaranteed returns with high rates in comparison to a savings account.
- Tax savings payouts come with a lock-in period of 5 years, under which tax exemption can be availed up to a maximum of INR 1.5 lakhs.
- Fixed deposits get renewed automatically on maturity without any need to visit a bank.
- Multiple fixed deposits can be opened at different banks, allowing you to save funds for a certain period.
- These deposits are easily accessible both in private & public banks. Internet banking facility can also be used to open a fixed deposit account.
- It comes with a flexible tenure ranging from 7 days to 10 years, which makes it suitable for both short-term & long-term investment goals.
ULIPs vs. FDs – Which one to choose?
One should consider ULIPs if:
- You have long-term financial objectives.
- You are looking for dual benefits of life insurance & investments.
- You are willing to accept a moderate level of risk.
- You want wealth creation along with tax benefits.
- You want flexibility in terms of switching between the funds.
One should consider FDs if:
- You are willing to preserve capital rather than high returns.
- You want to invest in short to medium-term investments.
- You want guaranteed returns & minimal risk.
- You want to invest in liquid funds.
- You are looking for easy-to-manage funds.
Conclusion
Both the plans have their own functionalities, benefits & features, where one plan takes care of wealth creation & the other of savings. But the decision of choosing one investment amongst the two will depend on the risk tolerance level, financial objectives, & investment horizon.