How to customize your life insurance policy with riders

Merely buying a life insurance policy such as a term insurance plan or a traditional endowment plan may not cover all risks.

life insurance

By Sunil Dhawan

Life insurance plans are primarily meant to cover the risk of dying early. They, therefore, act as an income replacement tool. However, one may face several other uncertain and unforeseen risks in life during which even a term insurance plan may not be of much help. Merely buying a life insurance policy such as a term insurance plan or a traditional endowment plan may not cover all risks.

A policyholder may become disabled due to an accident or otherwise, thus impacting his or her earning capacity. Failure of making timely premium payments towards the policy may render it inoperative and the objective of buying the policy will not be met. Also, there may be hospital-related costs during the tenure of the policy. Invoking the base policy may not help or may not even be allowed. And, what if one wants to enhance the coverage in an existing plan at a lower cost? Riders of life insurance plans may come handy in such situations. Let's see what are they and how they benefit.

Riders are additional benefits in a life insurance policy and are purely optional. They may or may not be attached to the base/primary policy. When attached, they come into play on the occurrence of the specific event and provide a financial cover over and above the basic sum assured. Riders may be attached to any insurance plan, be it a term plan, endowment plan, money back plan or unit-linked insurance plan. They help one customize the life insurance policy according to one's needs.

Types of riders
Accidental Death Benefit Rider (ADB): In case of death due to an accident, the rider sum assured of the Accidental Death Benefit Rider is payable in addition to the normal death benefit. So, if the basic sum assured is Rs 25 lakh and the policyholder has attached an ADB rider of Rs 10 lakh, the total claim amount will be Rs 35 lakh, if the death occurs due to an accident.

Accident and Accident Disability Benefit Rider (ADDB): Accidents may not always result in death but may leave the policyholder disabled. ADDB provides claim in case of death and also in case of disability due to an accident. Insurers have a cap of benefit under ADDB of, say, Rs 10 lakh. But check it before you go for it.

For some insurers, this rider may become active in case of total and permanent disability while for others it will be even for temporary disability. In the event of disability, the ability to pay premiums may also get hampered. A few insurers may also offer a 'waiver of premium' benefit in the event of disability wherein the policy will continue even without the premiums getting paid from the policyholder. However, get it confirmed from your insurer before going for this rider.

Waiver of Premium Rider (WOP): If not available as a benefit in ADDB, such a benefit may also be added as a WOP rider. On total and permanent disablement due to an accident, all future premiums both under the basic policy and the rider/s will be waived till the end of the term of the rider or death of the assured life, if earlier.

WOP Rider on CI: This rider covers 4 critical illness conditions: cancer, open chest CABG, first heart attack and stroke. On being diagnosed with any of these 4 critical illnesses, future premiums payable under the plan and riders (if any) are waived while the life cover as well as other rider covers continue.

Women CI Rider: This rider covers critical illnesses pertaining to women. On being diagnosed with any of the covered illnesses, a certain percentage of the base plan cover amount (sum assured) will be paid.

Income Benefit on Accidental Disability Rider (IB): Disability due to an accident may impact the earnings capacity of a policyholder. Adding it provides monthly income security in the event of accidental disability by typically providing a regular monthly income equal to 1 per cent of sum assured for a fixed period of 10 years.

Critical Illness Rider (CI): Also referred by other names such as major surgical assistant rider and dreaded disease rider, it provides an additional cover on contracting a critical illness. In most cases, the extra cover is equal to the sum assured on the base policy and is paid upon diagnosis of the illness. The illnesses covered vary among insurers, but most insurers cover cancer, coronary artery bypass, heart attack, kidney/renal failure, major organ transplant and paralytic stroke.

Buying a separate health insurance plan will make you hold two different policies- one for life and another to meet medical expenses. Claim settlement may also be a bit tardy when more than one insurer is involved. Further, premium for a health insurance plan will see an increase unlike the CI rider.

Before you sign on, check the list of illnesses covered and exclusions. Also, a few insurers terminate the base policy once a claim is made on the rider. A plan that continues to give you life cover, even if it means a marginally higher premium on the rider, is preferable.

Term Assurance Rider: Similar to a term plan, it offers the benefit in the form of a rider. Adding it to the base policy enhances the risk cover at a low-cost. Some insurers offer monthly payouts instead of a lump sum payment. In some plans, term assurance rider benefit may have a cap of Rs 25 lakh under all policies of the life assured with the insurer taken together.

Guaranteed Insurability Option Rider (GI): Insurance needs change as one grows older. With more liabilities, one may want to enhance one's life cover. The GI rider comes handy in such a situation. Adding the GI rider "insures your insurability" in the future by giving the right to purchase additional insurance at different life stages, without further medical examination.

>> As mandated by IRDAI rules, the total rider premium under all riders put together cannot exceed 30 percent of the base plan premium. Also, in case of term plans, premium under health riders cannot exceed 100 percent of the base plan premium.

>> The term of the rider cannot exceed the term of the base policy. Even the sum assured of the rider cannot exceed the sum assured of the primary policy.

>> Conditions relating to the term of the rider, age at entry and sum assured of each rider will also depend on the conditions of the base policy it is attached to.

>> Rider benefits will stop on the maturity of the policy or when the policyholder achieves the age of 65, whichever happens earlier.

Tax benefits
Premium paid towards the Critical Illness Benefit Rider or any other health-related rider will qualify for tax benefits under Sec 80D, while riders such as accident and disability benefit rider, accident benefit rider, and income benefit rider are eligible for tax benefits under Sec 80C.

Watch outs
Some plans allow riders to be added only at the inception of the policy while a few others may allow them to be added at policy anniversary. A life insurance policy may not allow adding all the riders, while some of the riders may only be available with online insurance plans of the insurer.

Adding a rider may help you customize your life insurance policy. For those who want to keep risk covers in one place or with a single insurer, such benefits are useful. However, evaluate the need for each specific rider rather than opting for them merely because of low premium.

DISCLAIMER does not recommend, solicit or advice visitors/consumers on any particular Insurance product, service or Insurance Company. Content on product types and features of specific products may vary from what is described in the article.

Consult your tax advisor for detailed advice.

Source: Economic Times


Related Article

Premium Articles