Published in Mint on Oct 27 2016, Written by Abhishek Bondia
What is a critical illness rider in a term insurance plan? When is the payment made if one has a critical illness rider with a life insurance policy? What is accelerated rider?
—Kaushal Jadhav
A critical illness rider provides a lump sum to the insured in case she gets afflicted by one of the specified diseases. Common conditions include: cancer, heart surgery, coma and brain tumour.
The number of illnesses covered by these plans vary considerably. Most cover 8 to 12 illnesses.
The claim becomes payable when the illness has been diagnosed. Claims are only paid if the insured survives a waiting period, sometimes called the survival period. The typical waiting period is 90 days.
Rider payouts can be either accelerated or additional. In case of accelerated rider, the base sum assured is reduced by the claim amount paid out for the rider.
Essentially, the term ‘accelerated’ is derived from the fact that a part of the base sum assured is paid out earlier.
In case of additional rider, the rider benefit is over and above the base sum assured. Let’s say in a situation where the base sum assured is Rs1 crore and the critical illness rider has a sum assured of Rs10 lakh. If the person dies 6 months after contracting cancer, then under the accelerated rider she will be paid Rs10 lakh for cancer, after crossing the survival period and her on death the nominee will receive Rs90 lakh. In case of additional rider, she will be paid Rs10 lakh on completion of survival period. On death, her nominee will receive Rs1 crore. For a critical illness, plan I suggest that you also evaluate the stand-alone insurances offered by health and general insurers. These often cover a larger number of critical illnesses and allow higher sum assured in some cases.
Is there a tax benefit on premiums paid for life insurance? After the maturity of my policies, will the proceeds be taxed?
—Rajbir Lohia
On payment of life insurance premiums, you can avail tax deduction of up to Rs1.5 lakh. Additionally, maturity proceeds of life insurance policies are exempt.
However, annuity income from a pension plan is not exempt and taxed at normal slab rates applicable to the insured.
Which is better if I’m planning for my daughter’s (3 years old) higher education—a child plan or a unit-linked investment plan (Ulip)?
—Ronesh Jha
A child savings plan in insurance could be either in the shape of a Ulip or a traditional endowment. A Ulip is market linked, where the fund allocation is under the control of the insured. One can determine the composition of debt and equity exposure.
Thus, returns are based on this composition and the fund’s performance.
In a traditional endowment plan, the premiums are invested in secure government securities.
After deduction of expenses the return on these plans is generally less than 4%. As, you have a long-term horizon for your child, you may be better-off considering a Ulip-based child plan as the returns could beat inflation, although there is no guarantee of that.
Also, do keep in mind that in the insurance you buy, the life insured should be the earning parent’s and not the children’s.
The insurance that you should buy before buying a child plan is a term plan for yourself. If you were to die prematurely then this will give a very large amount to your nominee. The death benefit in term plans is generally much more than that in endowment-based child plans.
Will a chain smoker have a lesser chance of getting a life insurance cover than an occasional smoker? Are there any implications if I don’t tell the insurer about my smoking frequency?
—Kuldeep Punja
Rack rates of life insurance plans are not determined based on smoking intensity of an individual.
Rack rates are generally higher and flat for all kinds of smokers. However, a chain smoker is likely to be at a significant disadvantage to get a life insurance policy.
Insurers get a cotinine test done before policy issuance. High nicotine levels could lead to non-issuance or a loading on even the smoker rates.
In the proposal form, insurers ask for status and frequency of consumption of alcohol and tobacco.
You should answer that truthfully. Non-disclosure or inaccurate information will be held against you, particularly if you have an early claim.
