Buying riders: You can be taken for a ride

A comprehensive personal accident policy is better than adding a rider to your current plan.

January is a month when tax-saving investments pick up feverishly and investment/insurance angels promising tax savings under various income tax sections parachute from heaven.

These agents mostly sell insurance due to the handsome commissions they make on the product. More than 80 per cent of life insurance policies that are sold, also include riders, but buyers rarely try to understand what they are getting into. Riders are nothing but additional insurance products bundled with the main one. It’s similar to buying a cola, garlic bread or dips with a pizza, under those combo offers, but not really that simple and economical. Buying insurance and riders is expensive and we better understand what we are getting into.‘Keep your insurance portfolio clean, comprehensive and economical’ is the relevant advice for people, who make a mess of it by taking unwarranted riders and policies. Don’t hesitate to buy insurance product but do it after a rigorous cost-benefit analysis.

 

COST VERSUS BENEFIT
Take, for example, the critical illness (CI) benefit rider available with a Term Assurance Plan from HDFC Life. An amount equal to the sum assured under this rider would be payable on diagnosis of any of the six illnesses covered under the rider, and it costs Rs 6,500 for a sum assured of Rs 10 lakh. Compare this to a Rs 10 lakh Critical Care Plan from the same company, covering 30 major illnesses but for a premium of Rs 7,500.

Don’t you think it’s worth spending that additional Rs 1,000 for covering an additional 26 illnesses? Many a time, Murphy’s law – ‘anything that can go wrong, will go wrong’ – plays heavily on our lives. Also, critical illness riders come with many limitations like a lower limit of sum assured, renewability, rigid structure, and so on. Riders are usually complicated to decode, with varying features and terms, and there is no standardisation across the industry.

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. What if you meet with a severe accident and are bedridden for a year, with an inability to attend office? There are also restrictions on the sum assured and the definition of disability varies widely.

To uncomplicate and have a more comprehensive cover, it would be better to go in for a standalone personal accident (PA) policy from a general insurance company. Many consumers do not get a PA policy, under the impression that the rider is serving the purpose. Or, worse, they are too lazy to fill another form and maintain another policy.

Under a comprehensive PA, temporary disablement benefit provides one per cent of the sum assured up to a maximum of 100-104 weeks in case of an accident. It also covers medical expenses. And, most important, the cover can be in line with your requirement, going up to Rs 50 lakh. The point is, when you are anyway spending on an insurance cover, why not get a better one?

Another popular rider is ‘waiver of premium’. Under which, your monthly premium payments are waived off if you become disabled or fall critically ill and your policy will remain in force. Conceptually, the rider sounds good: the problem is with the terms and conditions and availability of the rider. There can be a hefty premium, compared to the benefits. The definitions of disability are different and limited number of illnesses are covered, so when the suffering actually strikes, you may never be eligible to take the benefit.

THE OTHER WAY OUT
There is no alternative product for this. However, if you have a sound financial plan in place, you can build a good cover for yourself with a combination of term policy, PA policy, CI policy, mediclaim policy and an emergency fund. These could be termed the five pillars of an insurance portfolio.
 

RIDING ON STRATEGIES

Waiver of premium benefit
Build a larger emergency fund. Take a comprehensive critical illness and personal accident policy

Accidental death & disability benefit
Buy a standalone personal accident plan with total temporary disablement benefits

Term rider (with investment-oriented insurance)
Buy a term insurance policy with a higher sum assured and invest in equity-oriented mutual funds

Critical illness benefit
Buy a standalone critical illness policy

A term rider gives additional cover, usually on investment-oriented insurance policies, but comes at a higher cost. Suppose a 30-year male buys an LIC endowment policy. A term rider with Rs 10 lakh sum assured would cost around Rs 4,500, whereas a pure term insurance plan would be around Rs 3,800. Instead of this policy with a term rider, it would be better to take a term policy and invest the remaining money in equity funds, as the time horizon is longer.

Some riders are good under specific circumstances, like accidental death and waiver of premium, but should be taken after careful evaluation of costs and benefits. But don’t buy these blindly for some additional cover, more tax saving and the like.

The writer is a certified financial planner