Life insurance riders are like à la carte add-ons to a life insurance policy. When clients ask us, “What is a rider on a life insurance policy?” we educate them on how different types of riders allow them to get different forms of extended or enhanced coverage. Investopedia explains the place of riders in life insurance:
“Standard policies usually leave little room for modification or customization beyond choosing deductibles and coverage amounts. Riders help policyholders create insurance products that can meet their specific needs.”
Now, let’s take a look at the à la carte menu of life insurance riders available to consumers through most insurance companies.
Quick Article Guide:
1. Accelerated Death Benefit Rider
2. Child Rider
3. Long-Term Care Rider
4. Another Life Rider
5. Term Conversion Rider
6. Return of Premium Rider
7. Waiver of Premium Rider
8. Double Indemnity Rider
9. Find the Life Insurance That’s Right for You
The most common life insurance rider is an accelerated death benefit (ADB) rider. Many insurers offer this add-on automatically, but some charge, and a few do not offer it at all. An ADB rider allows you to access the death benefit in your life insurance policy before you die if you are diagnosed with a terminal illness.
Usually, an ADB rider will pay 50 to 75 percent of your death benefit to be used however you wish—whether for home care, your children’s education, or a once-in-a-lifetime family vacation. Your beneficiary will receive the remaining portion of your death benefit after you die.
Many parents who buy life insurance policies on themselves seek what’s called a child rider or child protection rider. If something were to happen to your child, a child rider would essentially serve as a small life insurance policy on them, without their having to complete a medical exam and apply for their own policy. Most child riders come with a $50k to $100k payout and protect the child from ages 0 to 18. They are designed mainly to cover funeral costs.
PolicyGenius explains how child riders are priced and purchased:
“You request a certain amount from the insurance company—usually in “units” of $1,000—and the cost per unit is added on to your yearly premium. The cost per unit depends on the insurance company, but most fall within the $5/unit and $7/unit range.”
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. If it is determined that you are unable to complete two or three ADLs, a long-term care rider can allow you to receive a portion of your death benefit funds to help with long-term care costs.
The six activities of daily living (ADLs) are generally defined as:
The U.S. Department of Health and Human Services, or HHS, 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.”
We discuss long-term care insurance and long-term care riders in greater detail here.
Similar in function to child protection riders, “another life” riders allow you to extend your coverage to another adult in your family, most commonly a husband or wife. These riders are purchased relatively infrequently because most adults purchase their own life insurance policy. However, they are extremely helpful if someone in your family is uninsurable or does not want to complete their own medical exam to obtain an individual policy.
Many companies do not offer another life riders, which is why working with an independent agency like JRC is important. We know which companies will offer you the riders you need to supplement your coverage.
Term life insurance policies expire after a set number of years, at which point you will need to apply and get approved for a new life insurance policy or use a “term conversion” rider to convert all or part of your term policy to permanent life insurance. Term conversion riders are accessible for a set timeframe before your policy ends, or up to a specified age (usually 70 or 75).
The reason term conversion riders are useful is because most people need more life insurance while they are younger and less life insurance when they get older. Ideally, you pay your mortgage, send your kids to college, and gain financial stability as you age. To avoid overpaying now for life insurance you might need later, you can add a term conversion rider to your frontloaded term policy.
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.
Luckily, the term insurance policy that she had purchased almost 20 years earlier offered a conversion option. With our help, she was able to convert her $500k term policy into a $100k whole life policy. This policy will provide her with coverage for the rest of her life, and she will not have to worry about a lapse in her current coverage. She was even able to qualify for her same rate class as when she had first bought her term policy, before she was diagnosed.
A return of premium rider states that if you outlive your term life insurance policy, you will be refunded the money you paid for the policy. This is a significant benefit, but it is not without a steep rise in cost along the way. A return of premium rider will usually double the cost of a standard term policy—understandably so, considering the insurance company pays if you die and pays if you live.
A return of premium rider can essentially be a ticket to free life insurance if you are healthy and your policy expires sooner than you do. But understand that you should have substantial savings to account for the higher policy cost.
Also note that a return of premium rider is very easy to lose. You need to make your premium payments on time every month, or the rider will quickly become void.
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.”
If you become disabled for more than 6 months, a waiver of premium rider will transfer the monthly payment responsibilities for your policy from you to the insurer. The tricky thing about these riders is that each insurance company has a different definition of “disabled,” and the contract language can be confusing to interpret—again an example of why you should work with an experienced 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.
Waiver of premium riders usually expire at age 60 or 65 because they are meant to provide financial relief if you are unable to work and bring in a steady, viable paycheck. 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.”
We saved perhaps the most complicated rider of all for last: the double indemnity. In life insurance, double indemnity basically states that your beneficiary will receive a larger payout if you die from an accident.
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 double indemnity, and again goes back to each insurer’s definition and contract language.
At JRC, we specialize in white-glove life insurance consultancy. We’re not concerned about sales quotas or competing insurance companies; we exist solely to help you find the right life insurance policy for your needs.
The process starts with gathering favorable and affordable policy options based on some very brief information that you provide us. We will then walk you through the application process and secure your policy, along with any riders you might 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.