Waiver of premium rider

A life policy only works while the premiums are paid. Stop paying and the cover stops too.

That is a problem, because the events most likely to stop a person earning are the same events that make the cover matter most.

The waiver of premium rider is aimed at exactly that gap. The workbook gives its trigger in one line: it is triggered if there is a disability or loss of income that makes it difficult to pay the premium.

So the trigger is not death, and it is not a diagnosis. It is the loss of the earning capacity that was paying for the policy.

Like every rider in the workbook's list, it is bought by paying an extra premium on top of the base policy.

The workbook stops there. It states the trigger and no more. It does not say what the insurer then does, for how long, or what the rider costs. It gives no figure for this rider at all.

What it does describe fully, in a different section, is what happens to a policy when the premium is not paid. That is the outcome the rider speaks to.

What the workbook actually says about the rider. Section 2.3 introduces the family: insurance companies also offer various riders that the insured can benefit from, by paying an extra premium. The waiver of premium rider is the fourth of six in the list, and its whole entry is: triggered if there is a disability or loss of income that makes it difficult to pay the premium.

That is the extent of it. The workbook gives no waiting period, no definition of disability for this purpose, no benefit period and no figure — no premium loading and no cap. A question here will be a matching question on the trigger.

The six riders in the list, and what separates them.

Note how this rider differs from the two nearest to it. The accident rider responds only to an accident and pays money out. The waiver rider responds to disability or loss of income from any cause the policy covers, and addresses the money going in. They solve different halves of the same problem.

What the workbook says happens when a premium is not paid — stated in section 2.1, which does not itself mention this rider. The two sections are separate and the workbook does not join them, so read the following as the outcome the trigger describes rather than as a stated effect of the rider.

• Non-payment within the grace period makes the policy lapse, and no claim is payable on a lapsed policy.
• A traditional investment-cum-insurance policy in force for at least 3 years (2 years where the term is under 10 years), with full premiums paid, may acquire a surrender value: a minimum of 30% of all premiums paid, rising to 90% in the last two years. For a single premium policy the guaranteed surrender value runs from 70% of total premium paid if surrendered within the first three years to 90% in the last two years.
• The alternative to surrender is to make the policy paid-up: the sum assured is proportionately reduced to the same proportion that the number of premiums paid bears to the total premiums due.
• The workbook works that formula. Surinder took a 25-year investment-cum-insurance policy with a sum assured of Rs 10,00,000, premiums half-yearly, so 50 premium payments in all. After 5 years he cannot continue. Only 10 premiums have been paid, so the sum assured is readjusted to Rs 10,00,000 x 10/50 = Rs 2,00,000.
• For a ULIP the position is different again: the lock-in is 5 years, a discontinuation charge of a maximum of Rs 6,000 applies, and the surrender value is paid only at the end of the lock-in.

Why the trigger is worded as it is. Read against that machinery, the rider's trigger picks out the one case where the policyholder has done nothing wrong and yet stands to lose the most: the cover was sized for dependents, the earning capacity that funded it has gone, and the automatic consequence is a lapse or a proportionately reduced sum assured.

Illustrative figures for the policy. The workbook gives no premium, benefit or loading figure for this rider; the paid-up arithmetic below is the workbook's own formula.

Mr Salvi, 34, takes a 25-year investment-cum-insurance policy with a sum assured of Rs 40,00,000, paying Rs 96,000 a year. He is the only earner for a wife and two children.

In year 8 an accident leaves him permanently unable to work. The household income stops. So does the ability to find Rs 96,000 a year.

What section 2.1 says happens if he simply cannot pay.

Total premiums due over the term         25
Premiums actually paid                    8
Sum assured                       Rs 40,00,000

Paid-up sum assured  =  40,00,000 x 8 / 25  =  Rs 12,80,000

His family's cover falls from Rs 40,00,000 to Rs 12,80,000 — a loss of Rs 27,20,000 of protection, at the precise moment his earning capacity has gone. The alternative is worse: let the policy lapse and no claim is payable at all.

He could instead surrender. Having paid 8 years of premiums — more than the 3 years section 2.1 requires — he would receive a minimum of 30% of the Rs 7,68,000 of premiums paid, that is Rs 2,30,400, and the cover would end completely.

Which of those three is the alternative to the rider. All of them. That set of outcomes is what a policyholder faces when a disability or a loss of income makes it difficult to pay the premium, and it is the situation the workbook names as this rider's trigger.

What this page will not tell you. Whether the rider would have kept the Rs 40,00,000 intact, for how long, or what it would have added to the Rs 96,000 premium. The workbook does not say, so no figure for it appears here.

Chapter 2 (Features of Life Insurance Products), section 2.3, lists the riders insurance companies offer for an extra premium, and gives the waiver of premium rider one line: triggered if there is a disability or loss of income that makes it difficult to pay the premium. It sits between the accident death benefit or disability rider and the guaranteed insurability option rider. Section 2.1, on the elements of a life insurance product, gives the lapse, grace period, surrender value and paid-up rules, including the Surinder example in which a Rs 10,00,000 sum assured is readjusted to Rs 2,00,000 after 10 of 50 half-yearly premiums.

Expect a matching question that pairs each rider with its trigger. The examinable distinction is between this rider, which responds to disability or loss of income affecting the ability to pay, and the accident death benefit or disability rider, which pays out on accidental disability.

• The trigger is disability OR loss of income, and it is qualified by the effect: that it makes it difficult to pay the premium. A question offering "disability" alone has dropped half the trigger.
• It is not the accident rider. The accident death benefit or disability rider responds to an accident and pays a periodic or lump sum to the insured. This rider is about the premium.
• It is not the critical illness rider. That needs a diagnosis of a life-threatening illness and survival for 30 days after it, and pays a pre-specified sum.
• Every rider costs an extra premium. The workbook says so once, for the whole list, and it applies to this one.
• The workbook gives no figure for this rider. No loading, no benefit period, no cap. If a question puts a number on it, that number is not from this workbook.
• The workbook never states what the insurer does once the rider is triggered. It gives only the trigger. Reason about the trigger, not about an assumed waiver.
• The lapse and paid-up consequences come from a different section. Section 2.1 gives them and does not mention this rider; section 2.3 gives the rider and does not mention them. Keep them apart in an answer.
• Paid-up reduces the sum assured proportionately, by premium count. 10 of 50 half-yearly premiums on a Rs 10,00,000 policy gives Rs 2,00,000 — not a figure based on years, and not a cash payment.