Term Insurance

Why critical illness rider is needed with a term plan

Nov 30, 2021

Even though it is hard to accept, life is full of uncertainties. As human beings, all of us face a lot of difficulties in our lives. Being diagnosed with a critical illness is one such life-changing event. If suddenly one day you are diagnosed with cancer, your life will turn upside down. In a situation like that, neither you nor your family will be able to think straight. The exorbitant medical expenses will add to your financial troubles even if you had saved up some amount of money for emergency purposes. This is exactly why you should consider opting for a critical illness rider when buying a term plan. 

You may or may not be acquainted with the concept of a term insurance plan. Simply put, a term plan is an insurance policy which guarantees financial security for your loved ones in case something untoward happens to you. A critical illness rider in a term plan is therefore an added advantage. You might be wondering why. Let’s see how and why a critical illness rider might be an extra benefit.

A critical illness rider is an additional benefit that you can avail of while buying a term plan. If the policyholder is diagnosed with a critical health condition like cancer during the policy period, the critical illness rider will offer financial protection to them. The money assured in this rider will be paid to the buyer which they can use for their treatment or other expenses. A typical critical illness rider covers illnesses such as cancer, renal failures, and so on.

How do Critical Illness Riders Work?

Now that we know what a critical illness rider is, let’s figure out how it works.

Consider the following scenario.

A man who is 30 years old decides to invest in a term insurance plan to ensure financial security for his wife and children in case he passes away all of a sudden. Now, the term plan he opts for offers a cover of INR 1 crore. A friend of his had advised him to choose a critical illness rider along with his term plan. He took the advice of his friend and opted for a critical illness rider along with his term plan. The rider assured a sum of INR 30 lakhs.  The premium which he paid for this was INR 12,000. While buying the policy he did not have to do any tedious paperwork and the process was hassle-free.

10 years later he was diagnosed with cancer. Needless to say, he and his family and friends were mentally devastated once they came to know about it. But he didn’t have to worry a bit when it came to his treatment costs or his household expenses and his children’s education. That’s because he had chosen to listen to his friend. The critical illness rider which he had bought came to his rescue. The 30 lakhs which he received helped him to take care of all the expenses. Since he had to quit his job, the insurer waived his premiums, making things financially easy and hassle- free for him.

But what if he hadn’t listened to his friend?

The need for a Critical Illness Rider

It’s very natural for you to ask: “Why do I need a critical illness rider?” Well, if you take a look at the scenario as discussed above, you can understand why a critical illness is important. But what if he had ignored his friend?

How he benefited from the critical illness rider

What if he hadn’t opted for a critical illness rider?

As we have mentioned before he opted for a critical illness rider with a cover of INR 30 lakhs. Since he opted for the rider he reaped the following benefits:

  • As soon as he was diagnosed with cancer, he received the assured sum of INR 30 lakhs.
  • He could avail of tax benefits under Section 80C, 80D and 10 (10D) of the Income Tax Act.
  • The premium which he had to pay i.e. INR 12,000 remained the same and did not change.
  • The insurer even waived his premium when he had to quit his job because of his physical condition.

But, if he had bought the term plan but not with  the critical illness rider, he might have faced the following issues:

  • His savings might not have been sufficient to take care of all the expenses, medical or otherwise.
  • He couldn’t have availed of any tax benefit.
  • He wouldn’t have received any other additional waivers or benefits.
  • If he did not have the term plan, his family and he himself would have been ruined financially. He might not have had the chance to undergo treatment or may have had to take a loan or seek monetary help for the treatment.

Benefits of a Critical Illness Rider

Now that we have discussed how things would have been if he had not opted for the critical illness rider, let’s take a quick look at the benefits provided by this rider:

  1. You will be paid a lump sum amount once you are diagnosed with a critical health condition. In case you are diagnosed with an illness covered by the rider, you will receive a sum of money which you can use for your treatment, hospitalisation or for other expenses. The money can be used to settle loans, pay off mortgages or deal with other liabilities.
  2. The premiums you pay for this rider remains the same throughout the policy term. Unlike typical health insurance plans, the premium for a critical illness rider does not change. It remains consistent throughout the tenure.
  3. You don’t have to deal with tedious paperwork if you opt for a critical illness rider. To avail of the benefits provided by a critical illness rider, you don’t have to fill up additional application forms or require medical testimonials or any other drab paperwork.
  4. You will receive the total sum assured in the rider if you are diagnosed with any of the illnesses listed under this rider. There are no sub-limits or deductions or capping. If, for example, your rider cover is INR 50 lakhs, you will receive the entire amount if you are diagnosed with a terminal ailment.
  5. There are double tax benefits. The premium paid is eligible for deduction under 80C and section 80D of the Income Tax Act, 1961. The overall limit of deduction for investment under section 80C and section 80D is INR 1,50,000 and INR 25,000 respectively. However, tax exemptions can also be availed on death benefit under Section 10 (10D) of the Income Tax Act. 
  6. There are policies which waive off payment of premiums if you are rendered bedridden due to any critical health problem. For instance, if you are paralyzed after you suffer a cerebral attack, you might lose your source of income. So, if your insurer exempts you from paying premiums any further, it will prove to be beneficial for you under such circumstances.

Things to Consider While Buying a Critical Illness Rider

But before you venture out to opt for a critical illness rider in a term policy, you need to be mindful of the points listed below:

  1. You must find out if the rider covers a wide range of critical illnesses. If a critical illness rider covers a large number of critical health conditions, it will certainly be a good choice. These days the number of critical illnesses covered range from 4 to 34.
  2. You should go for a critical illness rider with a low survival period. The survival period offered under the most critical illness riders available in the market ranges from 30 to 90 days. You should pay special attention to the survival period. This is because if a policyholder passes away before the completion of the survival period, no payment will be made against the rider.
  3. It is important to know about the payout option, i.e. whether it is an Accelerated payout option or an additional payout option. Under an accelerated payout option, a part of the base cover will be paid. Let’s say, your term plan offers a cover of INR 1 crore and a critical illness rider cover of INR 30 lakhs. Now if you are diagnosed with a critical illness that is covered by the policy, INR 30 lakhs will be paid from the base cover of INR 1 crore. But in case anything unfortunate happens to you because of your illness, your nominee(s) will receive INR 70 lakhs. This is because INR 30 lakhs was already paid at the time of your diagnosis.

Payout Option

Base Cover (INR)

Critical Illness Cover (INR)

Amount received after Diagnosis (INR)

Death Benefit (INR)

Accelerated payout option

1 crore

30 lakhs

30 lakhs (deducted from the base cover of 1 crore)

70 lakhs

However, in case of additional payout option, you will be paid the sum assured in your rider which has got nothing to do with the sum assured in your base term plan. So, if your term plan has a cover of INR 1 crore and critical illness rider cover of INR 30 lakhs, you will be paid INR 30 lakhs over and above the base cover i.e. INR 1 crore, if you are diagnosed with a critical illness. In case you fail to survive, your beneficiaries will receive the base cover amount i.e. INR 1 crore.

Payout Option

Base Cover (INR)

Critical Illness Cover (INR)

Amount received after Diagnosis (INR)

Death Benefit (INR)

Additional payout option

1 crore

30 lakhs

30 lakhs (additional amount over and above the base cover i.e. 1 crore)

1 crore

  1. You should be careful enough to read the terms and conditions mentioned in the agreement about pre-existing health conditions. Pre-existing health conditions are normally excluded. But many insurance providers have a waiting period of 2-4 years for pre-existing diseases. Hence, cover you after that.
  2. Study your agreement paper thoroughly. You must always go through your policy agreement thoroughly before opting for the rider. This is because different companies offer risk coverage for different critical illnesses.

Key Takeaways

It is always better to be prepared to face the unexpected and the unknown. Being prepared with a good financial protection plan is always a prudent thing to do. This rider is especially beneficial for chain smokers or those who have unhealthy habits like alcohol consumption or even overworking.

 A critical illness rider is a good enough option. However, there are a few drawbacks associated with this rider. They are listed below:

  • Certain insurance companies add an extra clause to the critical illnesses covered by the rider, like for instance the policyholder will be able to reap the benefit only if they are diagnosed with, say, cancer “of a specified severity”. Similarly, the rider coverage for stroke pinpoints certain symptoms and the policyholder will be eligible to receive the benefit only if they exhibit the specified symptoms. 
  • Besides, we have already discussed that pre-existing health conditions are normally excluded.
  • Sometimes, the rider may prove to be useless if the policyholder is diagnosed with a life-threatening malady within 90 days of the commencement of the policy. 
  • Complications arising from participating in hazardous activities like skydiving are excluded too. 

Despite all the above-mentioned drawbacks, a critical illness rider is a very wise way of ensuring financial protection against a sudden diagnosis of a deadly malady. We must agree that there exists nothing called a perfect financial protection plan. So, if we look closely the various benefits of a critical illness rider namely, unchanging premiums, double tax benefits, immediate payment of cover once diagnosed with any of the covered illnesses, far outweighs the drawbacks. 

But at the end of the day, you must consider your and/or your family’s needs. Depending on these needs, choose what is best for you. But, always read the terms and conditions very carefully before you invest your money in a policy so that during times of crisis you don’t have to deal with any extra tedious paperwork.

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