ULIP or FD: A Complete Guide to Choosing the Right Investment

When it comes to selecting between a fixed deposit & ULIPs, it all depends on the risk tolerance level, investment horizon & financial objectives of an investor. Both of them has their own pros & cons depending on the market situations. FDs are preferred by those investors who need secure & stable returns, whereas ULIPs are considered by those who want wealth creation along with financial security of family members. Let us now discuss both the investment plans in detail with the help of this article.

What is ULIP?

ULIP is a kind of life insurance which provides dual benefits of insurance & investment. Unlike term insurance, ULIP offers a part of the premium to be paid towards life insurance & the rest towards investment. This means a part of the premium is allocated towards investment & the remaining towards insurance. 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. Under ULIPs, if the policyholder dies, 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 is a Fixed Deposit?

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. 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 ULIP & Fixed Deposits

Provided are the differences between ULIP & Fixed Deposits:

Which is Better – ULIP or Fixed Deposit?

Before choosing between ULIP & FD, an investor can use a ULIP Calculator to calculate the potential returns depending on the premium amount, policy tenure, & allocation of funds. This plan allocates part of the premium towards insurance, & the remaining part is invested in either debt, equity, or both. This plan offers maturity benefits as well.

Though the decision on which is better amongst the two, namely ULIP & Fixed deposit, depends on certain factors, such as risk tolerance level, financial objectives, & investment horizon. Apart from these, there are certain other factors as well which make ULIP better than a fixed deposit. Let us see how: 

• Life insurance

The main advantage of ULIP over a fixed deposit is the inclusion of a life insurance component. It includes a death benefit in case of the policyholder’s demise, ensuring the financial security of family members. This way, investors enjoy the dual benefit of insurance & investment.

• Flexibility

ULIPs are considered to be quite flexible as they allow switching between the funds depending on the market conditions. The returns with fixed deposits remain the same, but the chances of high returns are there with ULIP.

• Tax saving

      Under ULIPs, the premiums paid are eligible for a tax deduction u/s 80C, along with an exemption from taxes on maturity benefits. But the interest earned on fixed deposits is taxable. 

Conclusion

The decision on choosing between the two investment plans, namely ULIPs & fixed deposits, depends on individual preferences, risk tolerance level, financial objectives, & investment horizon. ULIPs, which provide the dual benefit of insurance & investment, offer flexibility, though having higher costs & with a lock-in period. Fixed deposits, on the other hand &, are the most secure, low-risk investment plan that offers a fixed rate of return & is highly liquid. If you are looking for financial security along with investments, ULIPs are the better option.