You may have had this experience going to a car dealership to buy a new car: you agree to the purchase and then you find out that there are “other options” to consider, such as an extended warranty, upgraded floor mats, extra mileage for your lease agreement etc. So, what are life insurance riders all about?
Similarly, you can think about life insurance riders as an add-on, or additional benefits to supplement or enhance your life insurance policy you just bought. You can’t just buy the riders without the policy, and most riders are only allowed to be purchased at the time you buy your policy. For instance, you can’t buy a waiver of premium rider when you are disabled, it must be purchased at the beginning of the policy.
Most riders are usually at an added cost, however, some are already included with the policy. Most term coverage comes with a term conversion rider that allows you to convert your term policy to a whole life policy at the end of your term.
Do I Even Need Life Insurance Riders?
It’s a tough question to answer without knowing who you are. You may want to think of the reasons you are buying a life insurance policy in the first place, and its purpose. Are you buying a policy as a young breadwinner to protect your new family, and you have a 30-year mortgage? Are you buying a term insurance as a key business person? Are you financially responsible? How is your health?
Your first priorities should be the amount of coverage you’re buying, the term (if you buy a term policy), and your affordability level (how comfortable are you paying for the policy). Since most riders will cost you more, you probably want to start with the question “can I afford it?”
What Are the Most Common Life Insurance Riders?
Waiver of Premium Rider
This rider ensures that your life insurance coverage would remain in place in case you become disabled and can’t pay for it. The insurance carrier will waive the premium payments and keep your coverage active. Note that the policyholder must be continuously disabled for at least six months, and the disability must begin before a certain age, which is 55-60 for most companies.
Accidental Death Benefit Rider
This rider provides an extra death benefit amount, usually twice as much, if the death occurred as a result of an accidental injury. Some companies terminate the rider at a specific age. There are a few exclusions, such as engagement in a criminal activity, hazardous hobbies, and attempted suicide, to name a few.
Long Term Care Rider
This rider has benefits that can be used to pay for assisted living, a nursing home, or home health care, should you ever face a qualifying event based on your policy provisions. When you buy your policy, you will select the long-term care coverage. Your beneficiaries will collect a tax-free benefit after the qualifying requirements are met.
Return of Premium Rider
Also called “ROP,” this rider guarantees the return of your paid premiums after the term has ended if you outlive your term policy. Before you jump for joy, this rider comes at a substantial cost (sometimes 2-3 times as much as your monthly premium), and you don’t get interest back, only the actual amount you paid. For example, if you paid $100 a month for, let’s say, 20 years (or 240 periods), you will get back $100 times 240, or $24,000.
Disability Income Rider
Usually, this type of rider will pay a 1% monthly income of the policy’s face amount value, should the policy owner become disabled and be unable to work. It’s a guarantee that you can keep some level of financial security for you and your family if you can’t work. For instance, you have $250,000 face value, you could receive $2,500 per month (which is 1%).
Term Conversion Rider
Most term life insurance companies include this provision automatically. If you bought life insurance from Banner, AIG, or Prudential, you should have this included in your policy. It allows you to convert your term policy to a whole life by the end of the term, or by age 65-70 (depending on the policy), without going through underwriting or an exam.
You are guaranteed coverage if you choose so. There are many stipulations, ages, and coverages amounts, so make sure you understand it before converting. It’s useful for individuals who aren’t in the best of health and are near the end of their policy.
Accelerated Death Benefit Rider
This may be one of my favorite riders since it allows the policyholder to access some of the cash benefits while he/she is still alive. We all have this notion that “I only have life insurance for my loved ones, and even if I die I won’t see it myself.” Not true with this rider.
Imagine facing a terminal disease and seeing your family struggling with money and resources while you are dealing with the thought of dying and not seeing them. Dealing with such turmoil and also adding to the financial burden isn’t a picnic.
This rider allows you to tap into some cash based on the face amount in your policy. It’s usually a percentage or a fixed amount if you have less than 12 months to live. Paying medical bills, or going on a family trip are all acceptable. Some policies, such as Sagicor no-exam, have this rider automatically added.
Critical Illness Rider
This rider will pay a lump-sum benefit to the policyholder in case he or she is diagnosed with a critical illness such as cancer, stroke, heart attack, etc. This money is paid tax-free by the insurance company and is deducted from your total face amount benefit. The funds may be used for healthcare or anything you wish. Money never replaces the emotional pain a family faces when their loved one is facing such a challenge, but it reduces some of the financial stress they are all facing.
The least favorite of riders to consider buying. A child rider is a provision under the parent’s policy that covers their children in case they are to die. In my opinion, since a child isn’t considered a breadwinner to the family, life insurance is not needed.
Further, the death of a child is unarguably the most horrible thing anyone should have to experience, and a life insurance policy does not make that easier. This rider usually expires by age 25 (depending on the policy), but some will let you convert it to a whole life policy when the child reaches the “age of maturity,” which is often 21.
Guaranteed Insurability Rider
Also called GI rider is a provision which allows the policyholder to buy an additional life insurance coverage without an exam or underwriting process. The amount that can be added is a pre-defined amount defined by the insurance company and is subject to the insured’s age. Some companies have added coverage during special events, such as childbirth, marriage, etc. There is always a maximum pay-out on this rider.
Not all riders are available with all carriers or in all states, and some are really not necessary. Buying life insurance coverage own your own can only add more frustration to what is already a baffling industry.
The industry is changing on a regular basis, and you may have more important things to do other than wasting your valuable time reading fine prints, provisions, and exclusions.