Insurers are offering a variety of riders that promise low-cost, value-added cover. Don't take up these offers blindly
28-Feb-2011 •Research Desk
It is observed that pizza makers, instead of selling you only their standard offerings, sell additional toppings with their pizzas. Why do customers buy them? Is it because of a desire for additional ingredients that elevate the pizza’s taste, or the perceived benefits exceeding the cost? Though people with insatiable appetites will rave over the benefits of a buffet meal over a la carte, by and large combinations of any sort come with limitations or hidden costs. This applies especially to riders offered with life insurance products.
On the positive side, riders are convenient. They expand the amount and type of cover that you can get with your main life insurance policy. The amount of additional insurance you can get via riders depends on the value of the base policy. However, they also have certain disadvantages that you should be aware of. For instance, they get terminated once they are used or when the main policy terminates.
Cost or cover?
In the first place, your decision to buy riders should depend on your insurance needs. You should not buy them just because they are available at a low cost.
Take for instance the critical illness benefit. A policyholder who has this cover gets an amount equal to the sum assured if he is diagnosed as having one of the critical illnesses included in the policy contract. For a 40-year old healthy person having a cover of Rs5 lakh, the cost of such a rider starts from Rs3,000 and can go as high as Rs9,500. In comparison, a standalone critical illness policy (cover for Rs5 lakh for a 40-year old) starts from Rs1,500 and goes up to Rs7,500.
On the face of it, buying a rider may appear more desirable because of its lower cost. But the standalone policy covers a wider set of critical illnesses. In case of such a policy, you can also get a higher sum assured. Critical illness riders come with a lower limit on sum assured (determined by the value of the base policy). Further, their structure is rigid and there are limitations on renewal of the rider. Therefore, when you look deeper, a standalone product makes more sense despite its higher cost.
Accidental Death & Disability (AD&D) Benefit is another rider offered by many insurers. This rider pays the sum assured in case of the insured’s death or total and permanent disability due to an accident. However, the rider may not provide for loss of income due to temporary disablement, which is a risk that is more common. This is a state, which in some instances is worse than death, as it deprives you of the ability to earn.
A standalone personal accident policy from a general insurer offers more comprehensive cover. Not only does this policy cover for death due to accident, partial and total disability, it also covers temporary total disability and pays out a weekly compensation of 1 per cent of the sum assured up to a maximum of 104 weeks (two years). What is more, the size of the cover in this policy is not restricted by the sum assured on the base policy. In case of a standalone policy, you have the flexibility to hike your cover depending on your income, profession and age.
The arguments that we have stated above also apply to the other popular riders such as hospital cash benefit and term rider.
Perhaps the only rider that has merit is the waiver of premium rider. This rider waives future premiums if the insured dies or is disabled and is unable to continue paying the premiums. If this happens, the insurance company pays the remaining premiums. This is by far the most useful rider. Parents buying insurance plans to provide for their child’s financial future should certainly consider this rider.
Probability is the foundation on which insurance rests: here the risk of a few is spread over many. With the risks that one is exposed to in life on the rise, insurance is the best recourse for managing life’s vagaries. An all-in-one bundled insurance plan does not necessarily offer the desired risk cover. Instead, buying a portfolio of insurance covers may be a better approach. By including a combination of term cover, personal accident cover, standard health insurance and critical illness cover, an individual can make his insurance portfolio complete.
One need not buy all these four covers at one go; scale up according to your insurance needs, age and income. For instance, one could start with a health plan, then buy a term plan (post marriage), then a personal accident plan, and later, as one grows older, add a critical illness policy. The key is to gradually acquire a set of policies that provide comprehensive protection against insurable risks.
Going alone pays
Combing a rider with your life insurance cover offers you convenience. However, this may not be what you need. The rider may not help you when you need it most. Use the standalone approach to achieve your insurance needs without compromising on the extent of cover you get.
Standalone critical illness policies cover a comprehensive list of critical diseases. They impose no restrictions on the extent of cover.
Do not add riders to your policy just because of their low cost. Buy them only if they satisfy your insurance needs.
Level term cover: A term insurance policy in which the life cover can be enhanced for a limited period. The sum assured offered on these riders can not exceed the value of the sum assured on the base policy.
Critical illness or surgery rider: This rider offers a lump sum benefit to the insured if he is diagnosed as having a critical illness like cancer or stroke, as specified in the contract of the policy.
Accidental death or disability benefit rider: It provides a lump sum cover to the insured for death or disability due to an accident.
Waiver of premium rider: This is an essential part of child insurance policies. This rider waives off subsequent premiums if the insured or the earning parent dies or is disabled and is unable to continue paying the premiums. If this happens, the insurance company pays the remaining premiums.
Hospital cash benefit rider: It provides a pre-specified sum of cash for each day that the insured is hospitalised. The maximum number of days of hospitalisation during the entire term for which this rider is available is specified in the policy.
Riders typically cover only a few critical illnesses such as stroke, heart attack, cancer, kidney failure, among others. Also, the policy guidelines restrict the premium payable (and hence the sum assured you can avail) on such a rider. This usually depends on the type of policy and its tenure.
Term cover is the most cost effective and purest form of life insurance. It should ideally be bought by anyone looking for a life cover. Adding it as a rider is restrictive as you can only get a limited amount of cover.
Accidental death and disability benefit
A standalone policy of this type comes with a temporary total disablement cover, which is most useful. For instance, a fracture can prevent you from working for weeks. In such a case, this policy pays a weekly allowance that is linked to the insured’s income. Many riders do not offer this.
Hospital cash benefit
This rider pays a fixed amount per day for the number of days one is hospitalised. But it comes with a number of exclusions hidden in the fine print. One may be better off creating an emergency fund that can be utilised at the time of hospitalisation.
Waiver of premium
This is perhaps the only exception where a rider offers great value. Include it with child policies. This rider scores by waiving all future premiums on the policy without compromising on the benefits.