New age riders to life insurance: Types, benefits and how to choose one

Your traditional life insurance policy just got a little more attractive in terms of financial planning and goals. There are various additions on the vanilla policy that may make this conventional financial product more interesting.

But, you must know your lifestyles and figure out your objectives before going in for the additions to your life insurance policy.

“Riders are optional and add-on covers offered by the insurance companies,” explains Rakesh Goyal, Director, Probus Insurance Broker. Riders offer extra safeguards over and above the base life insurance policy at some additional cost.

There are multiple riders available for life insurance products, such as accidental death benefits, critical illness riders, and waivers of premiums, among others. Such riders make the base policy strong, and in the unfortunate event of the policyholder's death, their family member can be financially independent.

“The incremental advantage that riders provide is that they allow the customer to customise the insurance component to their specific needs and risks that they may be exposed to,” explains Srinivas Balasubramanian, Head of Products, ICICI Prudential Life Insurance.

“Today, people are seeking more than just basic term protection from their life insurance policies; they expect coverage that anticipates and protects against various life scenarios,” says Nitin Mehta, Chief Customer Officer & Head – Marketing, Digital & Online Sales at Bharti AXA Life Insurance, about the evolution of riders.

It was this demand that has led to the emergence of "riders" – add-ons that enhance the coverage of a life insurance policy, catering to the diverse needs of policyholders, by insurance companies.

“Riders can be attached to a standard policy for comprehensive financial coverage rather than individual products to cover each risk,” says Sunil Sharma, President-Chief Actuary & Chief Risk Officer, Kotak Mahindra Life Insurance.

They are also more affordable than a new policy altogether.

So riders to your vanilla insurance policy are a very helpful add-on. But, experts inform that you now need to analyse the sort of rider that is best suited for you rather than just rush to buy the rider.

“Choosing riders based on job and age is advisable, for example, opting for accidental riders for frequent travellers. Due to increasing stress levels and changing lifestyles, the critical illness rider is essential for all,” Anup Seth, Chief Distribution Officer, Edelweiss Tokio Life Insurance.

Experts give us some illustrations, so that we can gauge the sort of riders to our LI policy and how they may add value to our policies and our lives.

For instance, an individual with a family medical history should consider opting for a critical illness benefit along with a life insurance plan. “The critical illness benefit ensures customers have the required financial wherewithal to avail medical treatment in the event they are afflicted with any one of the critical illnesses covered under this benefit,” explains Balasubramanian.

Similarly, an accidental death benefit rider is a perfect addition to a life insurance plan for individuals who frequently use a car or bike, and therefore, are more prone to accidents. Having this rider enables customers to increase the overall life cover, ensuring the dependents have adequate financial resources to continue with their lives.

A term top-up rider provides an extra amount of life cover for a specific period of time. This will be relevant for a customer who is paying off a home loan or child's education loan and therefore has a greater need for insurance for a specific period of time. Once this period is over, the extra life cover ceases and only the cover of the base policy remains.

But of course, in riders one needs to check the fine print very carefully, as in any financial product.

“One needs to be aware of what is covered, excluded or covered post a specified period (normally called waiting period) especially under health riders while evaluating the riders,” says Sharma.

In some health riders there is a survival period which requires the life assured to survive for fixed number of days from the date of occurrence of covered contingency in order for the benefit to become payable.

The cover for the riders starts post the completion of the waiting period. This is to ensure that there is no adverse selection by the customers against the company. The covered contingencies, waiting period, list of exclusion, if any, etc. would help the policyholder to decide which rider is suitable for him/her.

Also, it is important to go through the definition of all the covered illnesses / surgeries in case of Critical Illness Rider or Surgical Rider or Daily Hospital Cash Benefit to understand the

1) Illnesses covered which also outlines the severity and the stage at which the benefit will be payable.

2) Surgeries covered and the tests or documentation required for verifying the same.

“Customers should bear in mind that add-on benefits can only be purchased along with the base policy,” says Balasubramanian. Therefore, it is very crucial for customers to continue paying the renewal premiums as it ensures the benefits of the base policy and add-on benefits continue uninterruptedly.

“It is essential for buyers to conduct thorough research and consult with insurance advisors before selecting riders,” says Mehta about riders for your LI policy. Assessing individual needs, potential risks, and affordability will ensure that the chosen riders genuinely add value to the policy and align with the policyholder's long-term financial goals.

Life insurance companies in India now offer a wide array of riders that policyholders can choose to enhance their coverage. Some popular riders include:

a) Critical Illness Rider: A lump sum pay-out is provided if the insured is diagnosed with a critical illness covered under the rider.

b) Accidental Death and Disability Rider: An additional pay-out is offered in the event of accidental death or permanent disability caused by an accident.

c) Waiver of Premium Rider: Future premiums are waived-off if the insured becomes disabled or critically ill, ensuring the policy remains active.

d) Income Benefit Rider: The nominee is provided with a regular income stream in addition to the death benefit.

e) Accelerated Death Benefit Rider: The insured is allowed to access a portion of the death benefit in advance if diagnosed with a terminal illness – Bharti AXA LI.

The cost of your riders and taxation

The tax benefits applicable to life insurance policies extend to the premium paid for riders as well. As per prevailing tax laws in India, premiums paid for life insurance with riders are eligible for deductions under Section 80C of the Income Tax Act, subject to the overall limit. Additionally, the death benefit received by the nominee, including pay-outs from riders, is tax-exempt under Section 10(10D) of the Income Tax Act.

“However, there are some exceptions to these general rules,” says Mehta. For example, if you take a loan against your life insurance policy, the interest you pay on the loan may not be tax-deductible. Additionally, if you receive a living benefit from a rider, such as a lumpsum payment for a critical illness, the payment may be taxable.

“The cost of riders completely depends on the individuals and changes from one company to another,” says Goyal. Also, there are multiple riders with different cover values, so the premiums change accordingly. To give an example, if a 30-year-old buys a term plan for ₹1 crore, he pays anywhere between ₹500 and ₹600 for accident death benefit with a cover value of ₹1 lakh. While for critical illness benefits, it can be anywhere around ₹2,500–3,000.

“The riders, their conditions and the premiums vary according to the benefits they offer,” says Balasubramanian. For instance, a 30 year old non-smoking male can buy a critical illness benefit of ₹10 lakh applicable for 30 years by paying a nominal amount of less than ₹12 per day. The accidental death benefit for this individual would cost approximately ₹2 per day for a cover of ₹10 lakh for a period of 30 years.

Manik Kumar Malakar is a personal finance writer.