Buy the right topping

For a small cost,riders augment the benefits available from a life insurance policy. Look carefully at the riders that come with a policy

Written by Amar Pandit | Published: February 16, 2009 12:07:28 pm

When people buy life insurance policies,they mostly focus on the premium they will be required to pay,the tax they will be able to save,and on the maturity value. Rarely do people look at the riders that are available with the policy. A lot of people don’t even know about the different riders that are available with the policy they intend to buy,and some don’t even know what riders are.

Riders are like toppings on a pizza and come in different flavours. In fact,riders are additional or enhanced benefits that you can buy with your life insurance policies. You can customise your life insurance policy by adding on different riders such as Waiver of Premium,Accidental Death Benefit,etc. Riders are generally invoked in case of certain eventualities and often come at a small cost relative to the cost of base policy.

Riders are not only available with traditional investment-oriented policies,but also with pure risk covers such as term plans. In fact,riders are an important part of your overall life insurance portfolio and should be looked at closely at the time of purchasing a policy. Four types of riders are available with most policies:

Accident Death & Disability (AD&D). This rider provides additional benefit in the event of accidental death. It also covers the risk of disability and provides for a one-time lump sum payment in the event of loss of more than one limb,or sight in both eyes,or loss of one limb and sight in one eye. This means that besides accidental death this rider also covers temporary and permanent disability. This disability should be the result of an accident and not an illness.

This rider is restricted to a maximum sum assured of Rs 10 lakh. The premium for this rider is very low — around Rs 1,500 for a Rs 10 lakh cover for a 30-year-old.

This rider terminates when payment is made in part or in full. Some insurers also offer a waiver of premium benefit through this rider.

Critical Illness Rider. This rider covers the risk of critical illness. It provides the insured with an amount in the event of him being diagnosed with pre-specified critical illnesses. Around 12-16 critical illnesses are covered; the exact illnesses covered varies from one life insurance company to another. Some of the common ones covered include cancer,stroke,major organ transplants (like that of kidney,lung,pancreas or bone marrow),heart surgery,renal failure (failure of both kidneys),

multiple sclerosis,and primary pulmonary arterial hypertension.

A few special critical illness covers are available for women as well. In the case of this rider too the cover is restricted to Rs 10 lakh. The sum assured is paid to the life insured when he is diagnosed with a critical illness and if he survives at least 30 days. However,if the policyholder dies within 30 days of the illness being diagnosed,he or his family will not get the sum assured. And no amount is paid if the illness is diagnosed within 90 days of taking the policy.

The entire amount is paid to the policyholder irrespective of the medical expenses and whether the amount is actually spent by him. In short,this is not a reimbursement plan such as Mediclaim but a benefit plan. The premium paid for this rider qualifies for tax deduction under Section 80D of the Income Tax Act.

Since the critical illness wordings are tightly defined,it would be prudent if you read them carefully or have your family doctor read them to see if the conditions are fair.

Waiver of Premium (WOP). This rider comes into force when the life insured suffers disability or has no means of income because of a critical illness or accident. The premium of the life insured is waived off but the insurance policy remains active. The premiums are waived off till the person overcomes the disability or injury and is able to work again. In short,this rider acts like a disability rider except that no monetary benefits are paid out.

This rider also assumes prominence in some children plans where the life insured is the child and the policy owner is the parent. In the event of the parent’s death,the premiums are waived off and the policy continues to be in force.

The premium for WOP depends on the premium and the sum assured of the base policy and that of other riders. This rider should be purchased only if the policy premium is high. Make sure you clearly understand the terms and clauses when this rider can be invoked.

Term Rider. This rider is only available with investment-oriented policies and not with term plans. It offers a very high sum assured at a very low premium. The death benefit offered can help the insured’s family clear off liabilities,meet day-to-day expenses and other unforeseen expenses in the event of the policyholder’s death.

However,the rider can only be taken for a maximum of the sum assured on the base policy. For instance,if you have taken a traditional life insurance cover of Rs 20 lakh,you can buy a term rider for another Rs 20 lakh at a fraction of the cost of the base policy premium. Though the maturity or survival benefits will be lower,your life insurance needs can be met at a very low cost. Term riders are extremely valuable. If you have not bought a term plan (but an investment-oriented plan),you should definitely make use of this rider to enhance the cover on that plan.

Other riders that are available from different life insurance companies include Critical Illness Woman,double and triple sum assured,and Major Surgical Benefit.

To sum up,riders enable you to customise your policy based on your specific needs. However,do not blindly buy all the riders that are available with a policy. Make sure you understand their utility and then take a call.

Key points

Riders enable you to make your policy more comprehensive in terms of the protection available

Usually they are available at a lower cost compared to the premium charged on the base policy

But their wordings can be tricky. Read them carefully or have an expert vet them to ensure that the conditions attached (for payment of benefits) are fair

The author is a Mumbai-based financial planner

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