Can riders be a substitute for a comprehensive life insurance plan?

Most people purchase life insurance as a layer of financial protection for themselves or their family members. There are a variety of life insurance products available in the market today. However, when compared to the rest, term insurance seems most affordable to most people. However, term insurance cannot be a replacement for comprehensive insurance policies that offer a wider coverage.  This is the reason why experts suggest to opt for riders/add-ons to enhance term insurance as get better benefits. But can riders substitute for a wholesome comprehensive policy?

Riders are purely meant to elevate the level of protection coverage for the policyholder, thus making the term insurance plan more comprehensive in nature. One may see riders as means to combine different types of benefits under the umbrella of a single policy. This leads to ease of management and efficient administration of the varied coverage needs in a single account.

Importance of riders

“Riders are ‘add-on’ benefits available in the forms of both health and life cover that can be attached to a base policy. A traditional income plan or a Unit-linked policy is usually designed to provide significant investment return but would often be inadequate in terms of protection needs. With such policies as a base, riders provide supplementary cover based on the needs of the customers, at a marginal incremental cost,” said Peuli Das, chief and appointed actuary at IndiaFirst Life Insurance Company Ltd.

Moreover, riders allow the customer a degree of flexibility in topping up or reducing the protection, by judiciously choosing the sum assured, the entry point, and the policy terms of the riders. In fact, there are regulations governing premium limits on rider benefits. This ensures the riders remain affordable and provide good value for money to the customers.

Popular add-ons for term insurance

There is the essential class of riders that is meant to complement term insurance. Very popular among them are health riders that cover the risk of critical illness and accidental disabilities by providing lumpsum benefits that help meet out-of-pocket medical expenses or provide financial support in case of loss of livelihood.

Moreover, there are accidental death benefit riders too, which enhance the coverage with a marginal increase in price in case of unfortunate death caused exclusively by accidents.

“Some riders provide a waiver of premium (WOP) in the event of death that is often crucial in income plans providing investment returns and some term covers. This ensures the policy does not terminate and the benefits are continued even in case of an untimely death or any contingency that might lead to the inability to pay further premiums. In the same vein, these riders are effective income replacement tools in case of contracting with critical illness or paralysis followed by accidents during the premium paying term,” Das asserted.

Are term insurance riders popular with customers?

Good uptake of term riders across the industry is a testament to the fact that term riders are quite popular, and they should be. First and foremost, they provide wholesome supplementary death benefits on top of much popular income and unit-linked plans.

Alongside, Das suggests, “Riders also serve the specific purpose of adding flexibility to a policy. A customer’s long-term needs keep changing with time; term riders help address this by using appropriate policy terms and coverage amounts. For example, say a customer needs a 1Cr coverage for the next 10 years but would need only 50 lacs coverage beyond that. This can be achieved by buying a 1 Cr policy for a 10-year term, and a separate 50 lacs policy after that. However, a much cheaper and simpler alternative would be to take a Rs 50 lakh coverage as a base along with a Rs 50 lakh rider benefit for the next 10 years. ”

It is imperative that the customer thinks through both the short- and long-term needs and makes good use of the riders to create the policy cover that fits their requirements.

Can riders replace comprehensive insurance policies?

Today, term insurance comes with a lot of inbuilt attractive options, income replacement, increase or decrease in sum assured, cover for a spouse to name a very few. While a rider will supplement the basic death benefit, the options in a rider will be limited and will not cater to such needs of the customers addressed by feature-heavy term insurance.

“Term riders are not meant to replace term insurance. The utility of a rider lies in enhancing the base policy and make it more comprehensive for the customer in a cost-efficient way. In a way, a rider is to be viewed as an’ add-on’ and can never replace a standalone benefit. Moreover, the rider benefit is limited by the contours of base coverage, policy term, or other terms and conditions offered with base plans and might not meet the need for standalone term insurance,” Das explained.

This means if you are paying a premium of Rs 10,000 every year for a base plan and entitled to coverage of Rs 1 lakh, your rider will cap your coverage to another Rs 1 lakh at the most. You will not be able to get a benefit of higher coverage of Rs 3 lakhs from the policy if that is what is your requirement.