Life insurance riders are like à la carte add-ons for a life insurance policy.
They can add a lot of bells and whistles to your coverage, but in many situations, they’re not worth the added cost.
This guide describes the most popular life insurance riders, and two little-known riders that many companies offer for free, but no policy should be without.
Quick Article Guide:
1. Accelerated Death Benefit Rider or ADB Rider
2. Child Rider or Child Protection Rider
3. Long-Term Care Rider or LTC Rider
4. Another Life Rider
5. Term Conversion Rider
6. Return of Premium Rider or ROP Rider
7. Waiver of Premium Rider
8. Double Indemnity Rider
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The most common life insurance rider is an accelerated death benefit or ADB rider. With an accelerated death benefit rider, if the insured is diagnosed with a terminal illness, like cancer, they can collect a portion of their policy’s death benefit while they are still alive.
In this situation, many companies will allow you to access up to 75 percent of your policy’s face value and you can use this money however you wish. While some people opt for better care, others have used this benefit to take the family on a once-in-a-lifetime vacation, pay off their mortgage, or set aside money for their children’s education.
If you pass away before your term ends, your beneficiary will still receive the remaining portion of your policy’s death benefit. You do not have to repay this money if you outlive your policy.
Our Verdict: We always recommend purchasing a life insurance policy with an ADB rider, even if the policy is a few dollars more a month than a comparable alternative.
Many parents who buy life insurance policies on themselves seek what is called a child rider or child protection rider.
If something were to happen to your child, a child rider would serve as a small life insurance policy for them in order to cover unforeseen medical bills or burial costs.
Most life insurance companies offer $50,000 to $100,000 of coverage to children under the age of 18, and no exam is required for approval. While these riders offer convenience, they also offer less benefits to the insured, and they tend to be more expensive.
For Example: Juvenile life insurance policies like Gerber’s Grow Up Plan allow your child to continue their life insurance as they enter adulthood. With a child rider, on the other hand, their coverage ends when your term expires.
Our Verdict: In most situations, buying a juvenile policy for your child is a better option than purchasing a child rider with your policy.
A long-term care rider works similarly to an accelerated death benefit rider except that you don’t have to be terminally ill for it to be accessible.
For instance, if you become disabled and your policy has a long-term care rider, you’ll have the option of accessing a portion of your policy’s death benefit to help with long-term care costs.
Most life insurance companies determine that a person is disabled when their primary care doctor feels that they are unable to complete two or three of the six “activities of daily living,” or ADLs.
The six activities of daily living (ADLs) are generally defined as:
More than 52% of Americans over the age of 65 will require some form of long-term care during their lifetime, and this number is expected to grow. The U.S. Department of Health and Human Services offers the following definition for long-term care insurance:
“Long-term care insurance policies reimburse policyholders a daily amount (up to a pre-selected limit) for services to assist them with activities of daily living. You can select a range of care options and benefits that allow you to get the services you need, where you need them.”
Our Verdict: This is a great benefit to have, but it’s also relatively expensive. We’ve explained more about long-term care insurance and long-term care riders here.
Similar in function to child protection riders, another life riders allow you to extend your life insurance to another adult in your family. Most often this adult is usually a spouse. These riders are purchased relatively infrequently because for most healthy adults, it’s less expensive for them to purchase their own policies.
However, another life riders are extremely helpful if someone in your family is uninsurable. With these policies, the “risk” is spread between both applicants, which keeps the cost down. This strategy also decreases the chances of the insurance company declining your application.
Many companies do not offer another life riders, which is another reason why working with an independent agency is so important. JRC works with more than 50 insurance providers and we know which companies offer the riders you need to supplement your coverage.
Our Verdict: If you and your spouse are in fair or better health, we recommend applying for your own policy first. If either of you are unable to qualify, purchasing a policy with another life rider might be your best option.
The downside to term life insurance policies is that they expire after a set number of years. When this happens, you have three choices: purchase another policy, pay a much higher premium, or go without coverage. Buying a new policy seems easy enough, but if your health has taken a turn for the worse, it might not be possible.
To offset this potential risk, some insurance companies offer a free conversion rider which allows the insured to convert all or part of their policy into permanent coverage. Most life insurance companies allow conversions until the end of your term, or a until a specified age, usually 70 or 75.
The majority of us need more life insurance protection when we are young and less as we get older. While we expect our need for coverage to be gone when our term policy ends, a conversion rider can be invaluable, especially if your health declines.
To avoid being without insurance later in life, make sure your term policy offers a conversion rider before you apply. This free rider has helped some of our clients secure invaluable coverage that they would have been forced to go without otherwise.
For Example: We recently helped a woman who had breast cancer, and her term policy was set to expire. She had the looming reality of being uninsured for at least a few years while she underwent breast cancer treatment and recovery. Luckily, the term insurance policy that she had purchased almost 20 years earlier provided a conversion rider. After we contacted the original insurer on her behalf, they agreed to convert her original $500,000 term into a permanent life insurance policy for $100,000.
This permanent life insurance policy will provide her with coverage for the rest of her life. She will also not have to worry about a lapse or increase in rates. That’s the benefit of a conversion option– it guarantees your future insurability, regardless of any changes that might occur to your health.
In this case, the conversion rider allowed our client, who would have been otherwise uninsurable, to keep her coverage, (and the rate class that she was originally approved for almost two decades prior), without a new exam or health questions.
Our Verdict: Most of the companies we represent offer this rider as a free benefit with every term policy they sell. This seems like a no-brainer– why risk being without coverage in the future if most insurers offer this benefit for free?
A return of premium rider states that if you outlive the term of your life insurance policy, you’ll be refunded for all of the money you’ve paid. This is beneficial because if you are healthy, a ROP rider can provide free life insurance.
Although this may seem like a great benefit, it also comes at a steep cost. This rider will double or triple the cost of a standard term policy, but understandably so because the insurance company pays you whether you live or die.
This is important to understand because if you decide to go with this policy, you should also have a substantial savings account to set aside money for the increased cost. Also note that a return of premium rider is very easy to lose. You need to make your premium payments on time or the rider will become void and you will lose your investment.
Fox Business explores the question of whether a return of premium rider is a better investment than a basic term policy with the difference invested elsewhere:
“To find the answer, subtract the annual premium for a basic term policy from the annual cost of a return of premium policy. The difference is how much you would have to invest each year during the insurance term. Then calculate what annual rate of return you’d need on that money to beat the amount you’d get back from a return-of-premium policy. Remember, money from the return of premiums is tax-free, but your own investment returns are taxed. In some cases (depending on age, sex, tax bracket and other factors), you’d need to get more than a 7% rate of return on your investment to beat the return of premium policy.”
Our Verdict: If you are earning enough income to maximize your retirement savings while setting some money aside, this might be a good choice for you. Just remember, if you stop your making payments, you will lose your investment.
If you become disabled for more than 6 months, a waiver of premium rider will cover the monthly payments of your life insurance policy to make sure your coverage stays active. While this benefit can be invaluable, it is important to review the fine print before signing up.
Here are some points to consider:
1. Each company has a their own definition of “disabled.” While some companies will honor your claim if you cannot return to your original occupation or line of work, others might argue that if you are able to scrub floors or bag groceries, you are not disabled.
2. Waiver of premium riders usually expire at a predetermined retirement age, (usually 60 to 70 depending on the company), because they are only meant to provide financial relief during your “working years.”
3. You are still responsible for making payments on your policy for the first 6 months your are disabled, including the added cost of the waiver of premium rider.
The contract language on these riders can be confusing. This is another reason why it’s important to work with an experienced and independent agent who understands the nuances of these riders both as a product, and as they apply to different insurers such as Prudential, Liberty Mutual, Banner Life, etc.
Investopedia makes an important note about accessing a waiver of premium rider:
“Many waiver of premium riders include a waiting period before the benefits can be claimed. The policyholder may need to be deemed disabled for six months before the premiums will be waived. Other factors may also be required, such as the policyholder may need to be, aside from the newly acquired disability, considered of sound enough mind and body that it would be reasonable to expect he could be an integral member of the workforce.”
Our Verdict: A waiver of premium rider is rarely worth the increased monthly cost. Most insurers won’t cover your premiums until you’ve been disabled for at least six months, and every company has their own definition what qualifies as “disabled.”
We saved perhaps the most complicated rider of all for last: the double indemnity. This rider seems like an ideal fit for anyone with a dangerous occupation because your policy will double the face amount paid to your beneficiary if you die in an accident. Unfortunately, however, most dangerous activities are excluded by this rider.
Financial Web explains:
“With a traditional life insurance policy, your beneficiary is going to receive the face value of your policy when you die. With life insurance double indemnity, you can actually create a larger payment for them if you die from an accidental death…Less than 5 percent of deaths are ruled an accident…Since there is a low likelihood of accidental death, insurance companies can usually sell this additional coverage for a very nominal fee. This type of coverage can be very beneficial to individuals that work in dangerous industries in which they could die accidentally.”
As you can probably guess, the gray area between accidental and natural death is a major complication in a double indemnity payout. The outcome of this situation again goes back to each insurer’s definition and contract language.
With that being said, we’ve never seen a double indemnity rider offered with any of the term policies we sell. Most often, this rider is included with guaranteed issue insurance policies or employer-sponsored life insurance policies.
Our Verdict: Most insurers offer this rider for free, but if your company doesn’t, examine the fine print before you pay for it. These riders usually have exclusions that limit the instances of when these policies will pay.
At JRC Insurance Group, we’re not concerned about sales quotas or weekly sales goals. Our owner-operated agency is here to help you find the best life insurance policy for your needs.
The process starts by asking you some questions about your health and lifestyle to determine the most favorable company for your health profile.
We will then walk you through the application process and secure your policy, as well as discuss any riders you may wish to add.
Ready to get started? Call us toll-free at 855-247-9555, or you can request a free instant online quote here.
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