I assume the majority of you shop online on Flipkart or Amazon. What happens if you buy a phone from one of these e-commerce sites? It displays a number of additional alternatives for add-ons, such as a phone’s back cover, earphones, a screen protector, etc. A similar scenario occurs when you try to buy a term insurance policy; you are offered several add-on options like accidental death cover, accidental disability cover, critical illness cover, waiver of premium, etc. These add-ons are called riders in a term insurance policy.

Sounds simple, doesn`t it?

But it’s not as simple as buying an accessory along with a mobile phone. In a term insurance policy, it is significantly more complicated. So, let’s understand the concept of riders first and then explore the different types of riders available in a term insurance policy.

Accelerated benefit riders and Additional benefit riders

Let us understand the concept using an example.

Accelerated benefit riders

Raju made the decision to purchase a term insurance policy of 1 Crore with a critical illness rider of 10 Lakhs, which, let’s assume, is an accelerated benefits rider. After 5 years, Raju was diagnosed with cancer. The insurance company will provide an upfront payment of 10 Lakhs.

What happens if Raju is unable to recover from cancer and passes away after 6 months? His family will receive 90 Lakhs, as 10 Lakhs has already been paid by the insurance company.

In an accelerated benefit rider, the total benefit under the term insurance remains the same, but the payment is accelerated, meaning the policyholder receives the benefit before death.

Additional benefit riders

Now, let’s consider a second scenario. Raju decided to purchase a term insurance policy of 1 Crore with an accidental death benefit rider of 50 Lakhs, which, let’s say, is an additional benefits rider.

After 5 years, Raju died in an accident. His family will receive 150 Lakhs, which includes the 100 Lakhs term insurance cover and the 50 Lakhs accidental death benefit cover.

However, if the death is due to natural causes and not an accident, his family will receive only 1 Crore.

I hope the concept is clear. Let’s move on to the type of riders in a term insurance policy.

Types of Riders

Accidental Death Benefit Rider

The accidental death benefit rider is typically an additional benefit rider in most term insurance policies. With this rider, if the policyholder dies in an accident, the family receives an extra sum assured in addition to the sum assured provided by the base life term insurance policy, as illustrated in the previous example (related to the concept of the additional benefit rider).

Should you purchase it?

No, it is advisable to avoid it. Personal accidental cover is intended to provide protection against Permanent Total Disability (PTD), Permanent Partial Disability (PPD), and Total Temporary Disability (TTD), rather than offering a death benefit. If you require additional coverage, it would be more beneficial to opt for higher-term insurance coverage instead of purchasing an accidental death benefit rider.

Accidental Disability Rider

An accidental disability rider can be an accelerated or additional benefit rider in term insurance policies. Ideally, it should be an additional benefit rider.

Under this rider, a specified sum assured is paid out in the event of disability resulting from an accident. The sum assured can be provided as a lump sum amount or as a monthly income for a predetermined period, such as 5 or 10 years, depending on the benefit structure outlined in the policy.

Let’s consider an example: Suresh is traveling from Mumbai to Pune when he is involved in an accident that leaves him disabled and unable to work in the future. Along with his term insurance policy, Suresh had obtained an accidental disability rider of 50 Lakhs. He may receive this amount either as a lump sum or as a monthly income over the next 5 or 10 years, depending on the chosen benefit mode.

Should you purchase it?

Avoid purchasing the accidental disability cover as a rider. However, it is advisable to purchase it as a separate policy from a general insurance company. Personal Accidental cover is purchased to provide coverage for Permanent Total Disability (PTD), Permanent Partial Disability (PPD), and Total Temporary Disability (TTD).

The reason for avoiding it as a rider is that the accidental disability rider in term insurance typically covers only Permanent Total Disability (PTD). Permanent Partial Disability (PPD) and Total Temporary Disability (TTD) are normally not covered. Additionally, the definition of accidental disability is not standardized among riders in term insurance policies.

Critical Illness Cover

Critical illness cover offers a lump sum amount to the policyholder upon being diagnosed with one of the critical illnesses specified in the policy. The payout is contingent upon the illness reaching a certain level of severity and the policyholder surviving for a specified duration.

For example, if an individual holds a critical illness rider of 20 Lakhs and is diagnosed with stage 1 cancer, the amount will not be disbursed as the illness does not meet the required severity. However, if the individual is diagnosed with stage 2 or 3 cancer, a lump sum of 20 Lakhs will be provided (this is just an example to show the payout on severity).

Most critical illness riders include a survival period clause, mandating that the policyholder must survive for 30 days in order to be eligible for the payout.

Should you purchase it?

Yes, you may purchase critical illness cover as a rider.

Opting for it as a rider is advantageous because it typically covers a broader range of critical illnesses compared to a standalone critical illness policy, and the premium remains fixed while it increases with age in standalone policies from general insurers.

However, it’s crucial to note that term insurance is typically recommended till age 60, while critical illness coverage is necessary throughout one’s lifetime.

Ideally, the critical illness cover should be an additional benefit rider.

Terminal Illness Rider

The terminal illness rider provides the policyholder with the entire sum assured specified in the term insurance policy if they are diagnosed with a terminal illness. For instance, if Raju has a term insurance cover of 1 Crore with a terminal illness rider, and after 5 years he is diagnosed with a terminal illness with a life expectancy of fewer than 6 months, the insurance company will disburse the entire amount of 1 Crore upon submission of a certificate from a medical practitioner.

The terminal illness rider is an accelerated benefit in all term insurance policies.

Should you purchase it?

Yes, you should purchase the terminal illness rider.

Nowadays, it is more commonly included as a feature in term insurance policies rather than being offered as a separate rider.

Waiver of Premium on Disability/Critical Illness Rider:

The waiver of premium on disability/critical illness rider exempts the policyholder from paying future premiums in the event of disability or critical illness.

For example, if Raju holds a term insurance cover of 1 Crore for a term of 20 years with this rider, and after 9 months he becomes disabled due to an accident, the future premiums will be waived off while the policy remains in force. In other words, Raju will not be required to pay the premium for the next 19 years. This rider can be advantageous in situations where paying the premium becomes challenging due to disability or critical illness.

Should you purchase it?

Yes, you can consider purchasing this rider as it can relieve the financial burden of paying premiums in the event of disability or critical illness.

This rider is also available in certain children’s life insurance policies in case of the policyholder’s death.

Conclusion

Ideally, a pure vanilla term insurance policy without any riders is sufficient. However, some term insurance policies come with built-in riders. If you have a specific need, it is recommended to opt for a rider that addresses that particular need, rather than purchasing all available riders. In some cases, purchasing a standalone policy from a general insurance company may be a better option than adding rider to a term insurance policy.

Points to Remember:

  1. It is generally not necessary to buy riders in a term insurance policy. A pure vanilla term insurance cover is often the most suitable choice.
  2. If you have a specific need, consider selecting a specific rider that addresses that need, rather than purchasing all available riders.
  3. Purchasing a standalone policy from a general insurance company might be a more favourable option than adding rider to a term insurance policy.

*Disclaimer- Nothing contained in the article is a solicitation, recommendation, endorsement, or offer by me. If you have any doubts as to the merits of the article, you should seek advice from an independent financial advisor. Registration granted by SEBI, membership of BASL, and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors. Investment in securities market is subject to market risks. Read all the related documents carefully before investing