Riders in Insurance

Riders and their use:

Riders are add-ons to insurance policies which help the policyholder cover himself financially for an additional set of risk events (and are not to be confused with Kolkata Knight Riders!!). They are the insurance industry’s innovation for customizing the insurance policy to the extent possible, while keeping a standardized base policy available. Riders provide additional risk protection, and thus the policyholder has to pay a risk premium. In most cases, riders can only be bought in conjunction with the base policy at the time of initial purchase, and cannot be added later. Riders are optional, provide pure risk, and do not have any investment or savings element to them.

Most riders are added on to Life Insurance policies, and have a significant tilt towards health related risk. Of late, we have seen that Motor insurance policies also have begun to offer riders along with the base policy.

Since the riders are typically bundled in with the base policy, they do not have any additional administrative charges or customer acquisition charges,  leading to a low cost.  IRDA has capped that the maximum premium that is paid for riders cannot be more than 30% of the base policy cost. Any benefit arising out of an individual rider cannot exceed the basic sum insured.

The issue in India is that the insurance sales agent is competing on price, and wants to convince the prospect to buy an insurance policy by showing him low price. When a rider is added on, the price of the insurance policy obviously goes up. Thus there is not much thrust on riders at the point of sale, leading to a take up rate for riders which is far lower than its potential.

Some of the most popular Life Insurance Riders are :

a. Double Sum Insured rider (mostly in Child Policies): In the event of a death to the parent, the sum insured is paid to the child (or guardian) at the time of the death, and an additional sum insured is paid at the maturity of the policy.

b. Critical Illness Rider (or Dread Disease rider): In this rider, the sum insured is paid to the life insurance policy holder in the unfortunate event of the policyholder contracting a critical ailment such as heart attack, renal failure, cancer etc. In most cases, the sum insured is paid to the policyholder and the policy terminates. Critical illness riders become more expensive with age, as the probability of contracting a critical disease increases. In certain cases, the insurance company would refuse the rider coverage to the insured due to their health condition at the time of entry. Thus it is better to buy the Critical Illness rider at a younger age.

c. Accidental Death and Permanent Total Disability rider Through this rider, an additional sum insured is paid to the nominee (in case of death) or to the policyholder in case of a permanent total disability.

d. Waiver of premium rider: This rider triggers in when the insured becomes completely financial unproductive (say through an accident or a disease) and is at the risk of not being able to earn. Under this rider, the insurance company takes on the responsibility of paying the premiums till the policy maturity at which stage, the sum insured (or the fund value) is paid to the insured

e. Spouse Insurance rider or Joint Life Rider: Through this rider, the insured and the spouse can be covered through a single policy. Sum insured is paid to the surviving member in case of death to one of the insured.

f. Guaranteed Insurability rider: Through this rider, you purchase the option of increasing your life cover at any significant life stage (marriage, birth of children etc ) which might increase your financial liability without needing to go through a medical examination.

g. Surgical assistance benefit rider: This rider provides much needed financial assistance to the insured during the time of a medical procedure needing surgery for 43 surgical procedures.

h. Investment Guarantee Riders: In case of negative market returns, this rider guarantees claim value to the extent of premiums paid.

Some of the Motor Insurance riders are :

Zero depreciation rider: Through this rider, the car owner can ensure that in the case of any claim, he is paid the full cost of claims on parts such as tyres, bumpers, windscreen etc. In the situation where the rider is not opted for, the insurance company would only pay the depreciated value of the parts whereas you, as the owner, would have a substitution cost which is much higher for the new parts

Return to Invoice rider: This rider ensures that in case of an accident or theft where the car is a total loss, the full invoice value of the car is paid to the car owner

Payments made towards riders (except Critical Illness and Health riders ) enjoy the benefits of Income Tax exemption under section 80C of the Income Tax Act. Critical Illness rider enjoys tax benefits under section 80 D. Proceeds received in the case of a claim are tax exempt under section 10 (10 D )