The feature of Waiver of Premium in a life insurance policy ensures that the policy does not end or become inactive even after the death of the policyholder or due to inability of the policyholder to pay the premium.
One of the most important conditions for a life insurance policy to remain active or in-force is that the policyholder has to keep paying the premium on or before the due date. By paying the premium, the life insurance contract between the policyholder and the insurance company remains valid. In a regular life insurance policy, on the death of the policyholder within the policy term, the sum assured or the death benefit is paid to the nominee and the plan ends. However, it may not always be the case. In some life insurance plans, on the disability leading to non-payment of premium or death of the policyholder before the end of the policy term, the policy does not end and instead the insurance company continues the plan by paying the premium into the policy. This is true only in those life insurance plans that have the unique benefit called ‘waiver of premium’ (WOP). The presence of Waiver of Premium benefit in a life insurance policy ensures that the policy does not end or become inactive even after the death of the policyholder or due to inability of the policyholder to pay the premium.
Waiver of Premium can either be a part of the policy as an in-built feature or it can be optionally added as a Waiver of Premium rider. If Waiver of Premium feature exists, then on policyholder’s disability or on death, the future premium payment to the insurer is waived and the policy runs its original tenure with all other policy contracts remaining the same.
In the case of disability, most insurance plans with Premium Waiver benefit will waive off the premium in case of permanent or total disability of the policyholder. During such an event, the earning capacity of the policyholder falls and hence such a feature helps in keeping the insurance policy active. Waiver of Premium as an inbuilt feature is mostly found in children insurance plans. Waiver of Premium can also be attached as a rider to a term insurance plan to take care of future premium after a permanent disability.
How waiver of premium works
As a parent, one wants their child to receive a certain desired sum of money at the desired age. For example, if the child is of 3 years, the parent may want to save Rs 50 lakh for the child when he or she is 21 years of age. If the death of the policyholder happens anytime in the 18-year term, in a plan without WOP, the sum assured and the fund value or bonus is paid to the nominee and the plan ends.
However, in a Waiver of Premium insurance plan, even after the death of the policyholder or the life assured, the plan continues. The insurer pays the sum assured and also keep putting in the premium into the plan on the due date. This ensures the fund value is for the child at the desired age.
Such child insurance plans are available as a traditional insurance plan such endowment plan or as a unit-linked insurance plan (ULIP). The cost of a Premium Waiver insurance plan is higher than a regular insurance plan as it takes care of future premium too.
To Sum Up
In a regular insurance plan, the sum assured or the death proceeds go to the nominee, who may not be in a position to deploy the entire sum of money optimally for child benefit. And, if the child higher education need is still a few years away, the probability of the death proceeds not meeting its desired objective may fail. If as a parent, you need to ensure that the child gets the desired amount at the right time, waiver of premium plans helps to meet the objective.