Term insurance riders: Weigh the relevant add-ons and premiums

The importance of term insurance in the personal finance of retail investors is generally well understood. A term policy covers the financial risk — loans, money goals, expenses and the like — for the surviving family members if the primary earner were to pass away unexpectedly.

However, apart from the plain-vanilla option of a regular cover, there are many add-ons to augment the basic term policy.

Some of the riders taken with term insurance include accidental permanent disability, accidental death, critical illness and waiver of premium.

Each of these riders comes with specific conditions and there are limits on the sum insured and payout.

Read on for more on whether you would need these riders with your term insurance cover and the costs involved, so that you can take an informed call.

Riding on add-ons

Most life insurers offer riders to policyholders. ICICI Prudential Life, HDFC Life, SBI Life, PNB Metlife, Tata AIA, Max Life and Aditya Birla offer term covers with 3-6 riders. Some are variants of the riders mentioned earlier and a few more are newer ones.

Accidental death rider, as the name implies, is an add-on that comes into force if a policyholder unfortunately dies in an accident. The nominee would get an additional sum assured with the regular term cover payout. Typically, on a ₹1-crore term insurance base cover, the accidental death rider would give ₹5 lakh to ₹10 lakh more.

For those who travel constantly on work by various modes to different cities or towns (in addition to regular work commute), this rider may be a good option.

The next add-on is the accidental disability. This rider applies when the policyholder suffers permanent disability due to any accident and is thus unable to continue his work or profession. In such cases, the rider benefit would be paid out depending on the severity. Usually, the amount paid is up to ₹10 lakh for a ₹1 crore term cover. Some insurers pay the rider sum as monthly instalments for a period of 10 years.

As an add-on, one of the most important riders is the one relating to critical illnesses. This rider is offered by many companies as a part of health and term insurance policies.

In a term insurance policy, the critical illness (cancer, multiple organ failure, heart and kidney ailments, etc.) rider works in a couple of ways. There are term covers that pay the full sum insured to the policyholder upon diagnosis of a major ailment — depending on the stage of illness. In most cases, the policy is usually closed after this payment. This type of rider comes without any additional payment.

The other option is to take a paid critical illness rider that gives out a sum of ₹5 lakh or ₹10 lakh usually upon diagnosis of a critical illness at a specified stage — advanced, initial, etc. This sum is in addition to the money that will be paid out later in case of unfortunate death, which would be the full term cover amount.

Given the increasing prevalence of critical illnesses due to poor lifestyle habits, it would be safe to shield yourself from such ailments. This rider is useful for all types of policyholders.

But most critical illnesses are covered under medical insurance covers itself and are paid out as lump-sums.

You can choose to opt for a rider via the term insurance route as well.

Waiver of premium is a common option offered by most life insurers. Some offer it for free as a part of the base policy itself. Others charge an additional amount to the premium for taking waivers upon diagnosis of critical illness, accidental disability, etc.

Most policyholders must opt for the rider, with or without the additional rider premium payment.

What they cost

The costs depend on the sum assured of the main term cover. For a ₹1 crore term cover given to a 35-year-old male non-smoker, the following charges would usually apply, according to data from Policybazaar.

Some insurers charge for the waiver of premium rider. This amount ranges from ₹560 to ₹960 a year. A few insurers have different charges for waiver of premiums asked for varying purposes — disability, critical illness, etc.

The accidental disability rider would cost policyholders an additional ₹170 to ₹370 a year. In the case of accidental death add-on, the extra premium to be paid would be ₹560 to ₹960 annually.

Critical illness rider is the most expensive of the lot. Charges range from ₹2,000 to ₹3,500 depending on the number of critical illnesses covered. Some insurers club the critical illness rider and waiver of premium and charge up to ₹11,000 for the add-on, as they would give a much larger sum assured.

If all the riders are taken, the total add-on premium for a ₹1 crore term cover with the demographic described earlier would be in excess of one-fourth the premium paid for the base cover. So, ₹5,000-6,000 would be the add-on premium charged for over and above ₹19,000 to ₹21,000 base premium.

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