All you need to know about Life Insurance Riders
Planning to purchase a life insurance plan? Are you aware that you can purchase a few add-on riders along with your life insurance plan to augment your insurance portfolio?
Common riders include critical illness, accidental death, waiver of premium, terminal illness and accidental disability rider. In this post, I will discuss what these riders are and whether it makes sense to opt for such riders.
However, there is an additional concept that you must be aware of (accelerated benefit or additional benefit) before you move on to life insurance riders.
Accelerated Benefit or Additional Benefit
In case of accelerated benefit, the Sum Assured under the term plan gets reduced by the benefit paid under the rider. As the name suggests, the total benefit under the life insurance remains same but the payment is accelerated i.e. the policy holder gets the benefit before death.
In case of additional benefit, the Sum Assured under the insurance plan is not affected by the benefit paid under the rider.
For instance, a critical illness rider can be both accelerated or non-accelerated (additional).
You purchased a term cover of Rs 1 crore with a critical illness rider of Rs 10 lacs. You get diagnosed with cancer. The insurance company will pay you Rs 10 lacs.
If the critical illness rider is an accelerated rider, then the Sum Assured under the plan will go down to Rs 90 lacs. In the event of death subsequently, the nominee will get Rs 90 lacs.
However, if the critical illness rider is not an accelerated one, then the Sum Assured will stay at Rs 1 crore even after payment of critical illness rider benefit (Rs 10 lacs). In the event of death subsequently, the nominee will get Rs 1 crore.
Critical Illness Rider under ICICI Prudential IProtect Smart Term Insurance Plan is an accelerated rider.
As I understand, Critical Illness Rider in HDFC Click 2 Protect Plus is additional rider.
Life insurance plans with accelerated riders are likely to be cheaper.
1. Critical Illness Rider
The benefit is paid if you get diagnosed with a critical illness such as cancer or renal failure. The payment under the plan is fixed and is not related to treatment costs. The exact coverage such as the number of illness covered is defined in the policy wordings.
If you are planning to add a critical illness rider to your life insurance plan, do keep following things in mind.
- Number of illnesses covered: Clearly, the one which covers more illnesses is better.
- Specified severity of the illness: Even though this is quite important, only a doctor can make out the difference.
- Survival period: It may sound bizarre but most critical illness plans require the policy holder to survive at least for a few days after the diagnosis of critical illness. If the policy holder dies before completion of survival period, there shall be no payment from the insurance company. Plan with low (or no) survival period is better
- Accelerated or Additional: I prefer an accelerated rider.
What you should opt for it?
First, you need to see if you need to assess if you need critical illness coverage. You can go through my post on critical illness plans for more on this.
If you must go for critical illness coverage, I will suggest go for a standalone plan (instead of critical illness rider). And if you want to go for critical illness rider, go for an accelerated rider.
2. Accidental Death Benefit Rider
Accidental Death is always an additional rider.
If you this rider to the life insurance plan, the insurer pays an amount over and above Sum Assured. For instance, if death of the policy occurred in an accident, the insurer will pay twice the Sum Assured or 1.5 times the Sum Assured.
The insurance pays under this rider only if the death happens in an accident. There shall be no payment under this rider if the death were to happen due to say, natural illness.
And yes, there is definition of accident. Accident must be caused by a sudden, external and violent force.
Do note life insurance requirement does not change because of the mode of policyholder’s death. It is not as if your family will need Rs 1 crore if you were to die due to cardiac arrest and Rs 2 crore, if you were to die in an accident.
However, I can foresee some utility in a specific scenario. It is quite possible that a serious accident results in hospitalization (admission in intensive care unit) and demise only a few days/weeks/months later. Prolonged hospitalization in ICU can run up a very high medical bill, which a moderate health plan may be unable to cover. Accidental Death Benefit can be useful to recover some of those hospitalization expenses.
What should you do?
I have always believed that you must cover reasonable risk through insurance. What is reasonable may vary from person to person. In my opinion, accidental death benefit rider may just be stretching insurance too far. You may differ.
3. Accidental Disability Rider
This rider can be either accelerated or additional (though an additional rider makes more sense).
Term plans typically cover only permanent disability. Temporary disability is generally not covered.
In the event of permanent disability due to an accident, your ability to generate income may be compromised. There will be additional expense on your care for nursing and physiotherapy. The payment under this rider can be used to take care of such expenses.
Do note disability due to a natural illness is not covered under this rider.
The mode of benefit payment may vary across plans.
For instance, if you purchase Rs 1 crore cover under HDFC Life Click 2 Protect Plus with a disability rider (of Rs 1 crore), the insurance company will pay you Rs 1 lakh per month for the next 10 years in case of accidental disability.
Under other plans, you may get a lump sum payout.
Standalone personal accident covers are quite comprehensive. The only issue is that most standalone covers do not provide a very large Sum Insured. Hence, taking up disability rider under your term insurance plan may be a useful addition to your insurance portfolio.
The issue is that there is definition of accident and disability. Accident must be caused by sudden, external and violent force. This can be very subjective. And subjectivity never helps when it comes to insurance. Do go through my post on personal accident insurance plans for more on this.
Must Read: Do you need a personal accident cover?
Despite many limitations in accidental covers (disability rider or standalone personal accident covers), there is still a big insurance gap that accidental disability rider can cover.
In my opinion, accidental disability rider is something you must consider. Go for an additional (and not accelerated) rider.
4. Waiver of Premium on Death/Disability
This is typically available in investment linked insurance plans (traditional life insurance and Unit Linked Insurance plans).
In case of term life plans, waiver of premium on death is not applicable. However, waiver of premium on disability may be useful in case of term life insurance plans.
In the event of death/disability of life assured or the proposer (parent), the future premiums in the plan are waived off and the policy continues till maturity. Hence, your investment plan stays on track. This rider can be useful when you are investing in the product to save for your children’s education and marriage.
For instance, you have to invest Rs 50,000 in an insurance product per year for 20 years. If something were to happen to you after 5 years, your family may find it difficult to continue the plan. However, if you have purchased this rider, all the future premium installments will be waived off (insurance company will pay the premium on your behalf). Hence, there shall be no premium burden on your family.
You are advised to keep insurance and investment separate. It is better to purchase sufficiently large term life insurance cover and chosen mutual funds/PPF/EPF/FDs for your investments.
However, if you are keen on traditional plan or ULIP, this rider makes sense.
5. Terminal Illness Rider
Terminal illness rider is always an accelerated rider.
If you are diagnosed with a terminal illness (death is imminent in the next few months), the insurance company will pay the entire Sum Assured. You must submit a certificate from medical practitioners that you are terminally ill and are not expected to survive beyond say 6 months. In my opinion, it may not be as easy it may sound. Personally, I expect doctors to be very optimistic.
Respective life insurance plans may impose additional document requirements before accepting claim under terminal illness rider.
The payment under this rider can be used by the policy holder to complete a few last wishes, say travel, donation to charity or perhaps more expensive treatment. It may also help in amicable distribution of wealth but there are other ways to do this.
I won’t be very keen on this rider.
How expensive are these riders?
I will consider two term life plans HDFC Click 2 Protect Plus and ICICI Prudential IProtect Smart Term plan. I consider a cover of Rs 1 crore for 30 years for a male aged 30 years.
Certainly not every expensive. However, you need to see the utility in your insurance portfolio.
Plain vanilla Term life insurance plan is quite crisp. The insurance company pays when the policyholder passes away. However, when you purchase add-on riders, you are getting in to certain conditions.
For instance, there is definition of accident, critical illness, terminal illness and disability under the respective riders. With critical illness, there is severity too. You can see there is an element of subjectivity too. Hence, you and your nominee should be prepared.
If I were planning to purchase a new life insurance plan, I will consider only a term life insurance plan (and not traditional life insurance plan or ULIP). Among the riders, I will pick up only accidental disability rider.
Don’t go with what I say. Go with what you are comfortable with. If you feel you must have a critical illness or accidental death, go for it. Just that stick to term life insurance.
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