Senior Financial Services Manager at Phillip Securities (Jurong East)
You are referring to the Policy Owners' Protection Scheme entitlements.
Your understanding is correct. The caps are applicable to the riders as well.
One thing to note is that while the scenario you stated may happen, it is also highly, highly unlikely, as insurers also transfer their risks to re-insurers.
Beyond that, regulations, in particular the capital adequacy ratio of the insurer (which is a measure of how 'prepared' the insurer is to pay potential claims), also mean that insurers themselves are well prepared for claims.