ULIP (Unit Linked Insurance Plan) and NPS (National Pension System) are probably two of the most popular investment instruments in India. Both are long-term savings plans that allow you to accumulate wealth for your future goals. ULIP and NPS are tax-saving investment options covered under Section 80C of the Indian Income Tax Act.
With many similarities between ULIP and NPS, you may feel confused about which investment option to choose? Which is better than the other? To make the right decision, you must know precisely what NPS and ULIPs are and how they work.
What is ULIP?
ULIP plan is primarily a life insurance policy that gives you the opportunity in various money market instruments of your choice. Thus, you get dual benefits of insurance and investment with a single product and a single premium.
When you buy ULIP, a specific portion of the premium is allocated to offering life insurance cover. The remaining amount is invested in different assets to suit your particular financial goals and risk-taking capacity. You can invest in debt, equity or hybrid funds and build wealth for your future needs.
What is NPS?
The National Pension Scheme is a government-backed pension scheme that allows you to secure your post-retirement life. When you buy NPS, you invest a small amount periodically in your NPS account throughout your working years, and when you retire or reach the age of 60, you can get a regular pension to support your financial needs.
ULIP vs NPS – Understanding the differences
Let us compare ULIP and NPS on the following parameters.
Since ULIPs primarily invest in debt and equity instruments, you may incur management fees up to 1.35% of the fund value. On the other hand, NPS has a lower management fee of 0.25%.
Minimum contribution amount
Since ULIPs are primarily insurance products, the premium may remain fixed throughout the policy term, and you cannot pay anything less than that amount. For NPS, you must invest at least ₹1000 every year to get a considerable amount as pension when you retire.
Family’s future security
ULIPs ensure that your family’s financial future is secured against uncertainties. If something happens to you, the insurer will pay the death benefit to your family. They can use the amount to take care of their everyday expenses.
NPS is a pure savings-cum-investment instrument, and it does not offer any financial protection to your family. If something happens to you, the nominee can withdraw the funds from the NPS account.
ULIPs come with a lock-in period of five years, and you cannot withdraw funds from your account during the period. However, after completing the lock-in period, you can partially withdraw up to 1/3 of the funds to meet your expenses.
NPS does not permit withdrawals until you retire. Upon maturity, you can partially withdraw the funds in lumpsum up to 40% and use the remaining amount to purchase an annuity.
ULIPs and NPS serve specific purposes and help you accomplish different goals. But, if you don’t have a life insurance cover, it is better to purchase ULIP as it guarantees financial safety to your family while allowing you to accumulate wealth.