Trap 18. ‘You Must Take Riders With Term Insurance’

Bengaluru-based Aman Kalra, 35, an IT professional, was  approached by an insurance agent who recommended him to take a term insurance policy. The agent convinced Aman to add several riders with his term plan, including critical illness and accidental death benefit riders.

What Aman didn’t realise was that adding these riders defeated the purpose of buying a term insurance, which is the simplest and, therefore, the cheapest insurance plan. It provides higher coverage at a lower rate because there are no frills attached to such a life policy.

Adding the riders increased the premium significantly for Aman. Besides, he had no clear understanding of whether or not he needed these riders as an add-on to a term insurance policy. Plus, the terms and conditions of the riders were too confusing for him.

In fact, in a few months, when Aman encountered a health issue, he found that the critical illness rider he was sold had only limited coverage compared to his earlier standalone health insurance, which he had relinquished after buying the new term policy with riders.

Says Anupama Bhargava, a certified financial planner and partner at Beekay Taxation & Investment LLP: “Despite regulations, most insurance plans are sold for the wrong reasons, which makes them either irrelevant for the purchaser or prove to be expensive propositions. For instance, term insurance, which is the best form of insurance, is often bundled with unnecessary riders like critical illness that make the premiums go higher.”

You should see a clear red flag when an agent or advisor pushes for adding riders to a term insurance policy without fully assessing your needs and financial condition. This is problematic for various reasons. One, all riders may not be suitable for every individual. For instance, a critical illness rider becomes redundant if you already have an all-encompassing health insurance plan. In case there is family history of a critical illness, you may want to consider a separate critical illness plan instead. Two, adding riders increases the financial burden, as the cost of the policy goes up. Three, riders turn a simple insurance plan into a complex one, making it harder for a layman to understand.

“The best way to shield against mis-selling and getting straddled with an unwanted cover is to read the policy information thoroughly, ask the right questions, and most importantly, buy the policy based on your unique needs,” says Bhargava.

Evaluate whether you need a rider in view of your needs and future goals. If you are confused, ask for clarifications. Lastly, seek written documentation and read and understand the terms carefully.