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Published in Mint on JUN 21 2016, Written by Abhishek Bondia
What is the cost of a living rider in a life insurance policy?
—Kanishk Mahapatra
There are two types of cost of living riders. One is a benefit to account for inflation and the need to replace higher income. Several life insurance products factor this in by having an increasing sum assured with age.
The second type of cost of living rider is where the benefit is paid if you suffer a critical illness or disability, either accidental or through natural causes. In the event of being diagnosed with a specified illness, the plan will pay a lump sum amount. This helps replace the loss of income due to the ailment, and provides for one’s cost of living.
My life insurance policy does not have a separate accident cover. Does it mean that if death happens due to an accident, the nominee will not get the sum insured?
—Harish Kapur
All life insurance policies cover death due to accident. The only exception is if the death happens due to an accident that is self-inflicted or is a suicide, in the first year of the policy. In any other case, the nominee will get the full amount of death benefit.
A separate accident cover is an additional benefit. If a policy has an accidental death rider, then the nominee will get additional money for this rider over and above the base policy benefit.
My son is 15 year old. Should I buy a child plan for him?
—Kailash Gupta
A child life insurance plan is essentially an investment plan. It is meant to accumulate a corpus for the benefit of the child’s future needs. For instance, marriage and college education, are common reasons for people to invest in a child plan. Your decision to buy a child plan should be based on the objective for which you are planning to save.
Generally, it is recommended to have an 8-12-year investment horizon while buying a life insurance investment plan. This is to ensure that the upfront administrative costs gets amortised over a long-term, and the equity portion of the corpus has sufficient time to grow. In case you have more short-term goals, I would recommend you to look at bank fixed deposits, or short-term money market mutual funds.
The best child plan that you can buy is a term insurance on your own life. When you die, there will be a sum assured paid that will take care of your child’s main expenses over the years.
Most of the child plans available today are primarily investment plans that pay a benefit that is linked to milestones in your child’s life. These plans generally have an inbuilt waiver of premium riders that keep the insurance active for the child even after you die. You can consider these once your basic term plan is in place.
Do note that in traditional child plans, the effective returns are 2-5% of premiums paid, and in unit-linked insurance plans the benefits are completely market-linked