Some riders offer useful benefits, but they can substantially jack up the costs of buying insurance
- Accidental death riders are economical but carry a lot of exclusions
- Disability benefit riders kick in only 180 days after accidents
- Critical illness riders are useful, but among the most costly additions to your term plan
Apart from allowing you to structure your term plan in different ways through options (read here), life insurers also tempt you with another set of add-ons – rides on your term insurance. Riders allow you to cover additional risks to your income, for an extra premium added to your base term plan.
Term plan riders- basics
Term insurance riders can be bought either at the same time as the original plan or added on later, based on the rules set by the insurer. There’s no limit on the number of riders you can buy. The risk cover provided by the riders ends at the same time as your term plan.
But IRDA rules do impose certain limitations on these riders. They are as follows:
- The sum assured on any individual rider cannot exceed that on the base policy.
- The total premiums you pay on health and critical illness riders cannot exceed 100% of the premium on your basic term cover.
- Premiums on non-health riders are capped at a lower 30% of the basic premium.
- The premiums you pay on riders enjoy the same tax breaks as your term policy.
- Non-health riders get section 80C benefits, health riders get section 80D benefits and the maturity payout is exempt under section 10(10D).
Here’s the low-down on choosing them.
Accidental Death Benefit Rider
If you choose to add this rider to your pure term policy, the insurer promises a higher payout to your family in the event of your death due to an accident. Most insurers allow you to choose the amount of extra cover you’d like to buy under this rider subject to 100% of your basic policy. That is, if you are buying a basic term insurance for Rs 1 crore, you’ll be able to add on an accidental death benefit rider that promises another Rs 1 crore to your family in the event of your death by accident.
Most folks get tempted to sign up for accidental death benefit riders because they seem to carry very nominal premiums compared to the basic term cover. For a 45-year old male seeking a Rs 1 crore cover until age 75, we found that a pure term cover cost between Rs 22,000 and Rs 38,000 a year depending on the insurer. Accidental death benefit riders for another Rs 1 crore (100% of the base plan), cost extra premiums of between Rs 5,500 and Rs 8,500 a year.
You should be aware that all accidental death benefit riders come with loads of fine print. The payout is made only if death occurs within a specific number of days after the accident (120-180 days) and not after that.
However, do note that this is largely because the probability of accidental death does not go up with your age and is a function of your occupation. Personal accident covers can be bought separately from general insurers under very similar terms, for more reasonable premiums. While accidental death riders that you sign up for in your term plan last throughout the policy term, those from general insurers must be renewed a year at a time.
You should also be aware that all accidental death benefit riders come with loads of fine print. The payout is made only if death occurs within a specific number of days after the accident (120-180 days) and not after that.
The bodily injury that causes death should be direct and only from the accident – caused by ‘external, violent and visible’ means. Claims can be refused if the accident is due to self-injury, insanity, immorality or occur under the influence of drugs or alcohol or the person committing an illegal activity.
Some insurers also exclude accidents suffered while participating in strikes or industrial disputes. Accidents arising from hazardous occupations (such as military or security organisations), riots/terrorism/civil commotion, pursuing adventure sports and nuclear contamination are usually excluded.
Accidental Disability Benefit Rider
An add-on to the above, this rider compensates you for inability to work or earn an income if an accident results in a permanent disability. Most insurers make monthly payments (to make up for loss of income) for 10 or 15 years on this rider getting triggered. The payouts are specified as a percentage of the sum assured (1% or 2% a month). This rider usually costs less than the accidental death benefit rider. For a 45-year old man seeking coverage until 75, HDFC Life offers the accidental disability benefit rider at an annual premium of Rs 319 for Rs 10 lakh sum assured.
Disability riders carry the same conditions and exclusions as accidental death benefit riders, but with two additions. The claim becomes payable only for disabilities that occur within 180 days of an accident. The claim may also not be paid immediately after an accident, as insurers usually specify that the disability should last for 180 consecutive days for it to be considered permanent. Exceptions may be made in severe cases. Insurers also have a list of disabilities that they will cover, while the rest are excluded.
For an additional cost, some life insurers also tag on a Waiver of Premium Rider with the Accidental Disability rider. This rider allows you to skip premium payments for the remaining policy term if affected by disability, with the insurer footing the bill. But this may cost you extra in annual premiums.
Critical Illness Rider
This rider pays out a lumpsum amount as a proportion of your basic sum assured, on your being diagnosed with a critical illness. The specific illnesses that will be covered are listed out at the outset by the insurer and you have no choice in the matter. Critical illness riders from popular life insurers covered anywhere between 20 and 60 critical illnesses, with heart attack, cancer, kidney failure, paralytic stroke and cardiac surgery being the ones the commonly covered.
This is among the most expensive riders you can choose to add on to your pure term cover. It substantially hikes up your premium payout for the entire term of the plan.
Like other riders, critical illness riders also carry many escape clauses for the insurer. First and foremost, the lumpsum amount is payable only if you survive for 30 days past the diagnosis of a critical illness or the performance of a critical surgery. Illnesses that had cropped up prior to the taking of the policy, those resulting from diagnosed congenital/childhood conditions, self-harm or surgery that is not medically necessary, are excluded.
Do note that this is among the most expensive riders you can choose to add on to your pure term cover. It substantially hikes up your premium payout for the entire term of the plan. Evaluating term plans from six leading insurers we found that adding just a Rs 10 lakh critical illness rider to a basic term policy, jacked up its annual premium by anywhere between 30% and 70%! Given that your probability of contracting critical illnesses rises sharply with age, the premiums on this rider accelerate with age.
Premium quotes from one insurer showed that a Rs 10 lakh rider taken in the early 20s costs Rs 800-900/year, going up to Rs 1500-2000 in the early 30s, Rs 5000-8000 in the early 40s and shooting up to Rs 15000-23000 in the early 50s. But as there seem to be no standard norms how much an insurer can charge for this rider, there are wide variations.
While a lumpsum compensation on critical illness is a useful thing to have, there’s no compulsion to opt for this as an add-on to your term insurance plan. Health insurers offer standalone critical illness policies that offer greater flexibility on choosing the amount and period of cover, while offer wider coverage.
Yes, in a critical illness rider with your term plan, the premiums are fixed throughout the policy term and you don’t have the hassle of renewing the policy annually. But once you opt for a critical illness rider with your term plan, you’ll need to pay premiums for the entire policy period to retain the cover. Whereas with a standalone policy from a health insurer you can take the cover when you near the age when you are at high risk and terminate it when you don’t need it.
Overall, while riders do offer some utility, if you want to keep the cost of your term insurance plan to a minimum, they can be safely given a miss. The benefits offered by them can be obtained from standalone policies from general or health insurers when affordable.
This is the final article in a 5-part series that covers all you need to know about how to go about choosing a term insurance plan. Read the first three parts here:
- How much life insurance do you need? – https://www.primeinvestor.in/how-much-life-insurance-do-you-need/
- Until what age should your life insurance last? https://www.primeinvestor.in/until-what-age-should-life-insurance-last/
- Who doesn’t need life insurance? https://www.primeinvestor.in/who-doesnt-need-life-insurance/
- What term insurance options should you choose? https://www.primeinvestor.in/term-insurance-options-what-to-choose/