One of the common misunderstandings about life insurance policies is that they’re fairly generic. That is, they provide a basic death benefit in exchange for a specific premium. If that sounds kind of one-dimensional, that’s because it is.
But it’s not the reality of life insurance today.
Through the use of life insurance riders, you can customize a basic life insurance policy to fit any personal preferences, needs, or special provisions you may have. Certain life insurance riders can even provide benefits while you are still living, which moves life insurance beyond a simple death benefit.
If you’re planning to apply for life insurance, you should familiarize yourself with the purpose of riders as well as the basic types that are offered.
What are life insurance riders?
A life insurance rider is an optional provision you can add to a basic life insurance policy. They can be used to customize your policy to provide for specific needs that may not be adequately covered by the underlying policy. In effect, they provide extra benefits that may allow you to add additional coverage to your base policy, access benefits while you are still alive, or even convert from one policy type to another.
Since a life insurance rider is an additional feature added to your base policy, you will typically pay an additional premium for each one that’s added. Specific premium costs will depend on the rider added, the dollar amount of the benefit it provides, and individual factors, like age, health, and family status.
You’re under no obligation to add riders to a life insurance policy, but you do owe it to yourself to explore the possibilities offered by the company issuing your policy.
This can be done either by asking a representative of the company to provide you with a list of the riders they offer, or by expressing any special needs you want to be included in your policy. The representative or agent will then be able to match you with the option(s) that will best fill that need.
Rider options vary by the insurance company
Available riders will depend on the life insurance company you’re making an application with. To reduce premium costs, some insurance companies don’t offer options at all.
If you’re looking for a specific rider it pays to shop
The number and type of riders vary from one life insurance company to another. If you’re looking for a specific rider, or just a company that has the largest number of options, you’ll need to shop.
Getting individual quotes from multiple insurance companies can be time-consuming if you approach it one at a time. But there are online life insurance marketplaces that will enable you to get multiple quotes by completing a single, simple online application.
Read more: How To Buy Life Insurance The Easy Way
Different types of life insurance riders
Below are some of the more common types of life insurance riders out of the dozens that are available from the life insurance industry.
This is a rider you can add with a whole life insurance policy. Let’s say you take a whole life policy with a $200,000 death benefit because that’s all you can afford at this point in life. To increase the death benefit, you can add a term rider, which may provide an additional $200,000 death benefit. The term rider can be for 10 years, 15 years, or any term that’s needed based on your family situation.
The advantage of a term rider is that it disappears at the end of the term when it’s no longer needed. That means the extra premium you’re paying for the rider will disappear too.
Accidental death rider
This is a rider that will pay an additional death benefit if you die in an accident rather than from natural causes. A typical accidental death rider will pay double the base benefit of the policy. If the base benefit is $100,000, your beneficiaries will receive $200,000 if you die in an accident.
This will be a valuable rider to have if your occupation or lifestyle carries a higher than usual possibility of accidental death. For example, if you work as a roofer – which is one of the highest risk occupations there is – an accidental death rider will be a smart addition to your policy.
Accelerated death benefit rider
Referred to a living benefit rider, an accelerated death benefit rider enables you to access some of the proceeds of your death benefit while you are still alive. It’s designed to provide a benefit for those who have been diagnosed with a terminal illness and a life expectancy of not more than 12 to 24 months.
A typical rider will allow you to access 50% or even as much as 100% of your death benefit while you’re still alive. The funds can be used to pay medical costs and living expenses, with the unused portion paid to your beneficiaries upon your death.
Be sure to ask about this rider on any life insurance policy you apply for. Some companies make it an automatic provision and don’t charge an additional premium. But with others, it’s optional and will result in a small premium increase.
Critical illness rider
If an accelerated death benefit rider is designed for those who have a terminal illness, a critical illness rider provides living benefits for a serious health condition that you’re likely to survive. For example, the policy will pay a certain percentage of the death benefit for health conditions like cancer, heart attack, stroke, or any condition that’s likely to result in a reduced lifespan.
Just as is the case with the accelerated death benefit rider, your beneficiaries will receive a reduced amount of your policy upon your death. This is a rider worth considering since many critical illnesses involve the use of services that may not be covered by your health insurance policy.
Return of premium rider
Insurance agents love to sell the idea of cash value life insurance policies. They not only provide a death benefit, but also include an investment provision. That will create a living benefit in itself.
However, cash value life insurance policies are expensive, which is why consumers typically favor term insurance instead. But one of the basic limitations of term insurance is that you can pay for a policy for 20 years and have nothing to show for it at the end of that term.
A return of premium rider can fix that. If you add this provision to your policy, your premiums will be returned to you at the end of the term. This won’t be the same as having a cash value, but at least it will return most of the premium, often plus interest, to you on termination.
I said, “most” because a return of premium rider comes at a cost. You’ll pay an additional premium for the rider, and that portion will not be returned to you. For example, let’s say your annual premium for a 20-year term policy is $1,000. You opt for the return of premium rider which will increase the cost to $1,200.
At the end of 20 years, you’ll receive $20,000 ($1,000 X 20 years) – plus interest – but forfeit the additional $4,000 ($200 X 20 years) you paid for the rider.
If you can afford the additional premium for the return of premium rider, it can make the cost of term life insurance even less expensive over the full term.
Guaranteed insurability rider
This is a rider you can add that will allow you to purchase additional coverage in the future without needing to qualify based on the condition of your health. It can be especially beneficial if you have a term life insurance policy since it will expire at the end of the term. For example, if you have a 20-year term life insurance policy, guaranteed insurability will allow you to extend the policy – usually in shorter increments, like five years – even if your health has deteriorated since you originally took the policy.
It’s important to understand that while a guaranteed insurability rider will give you the ability to either purchase additional coverage or renew an existing term policy, you will pay a higher premium for the additional coverage for the extension. That’s because the new coverage will be purchased at a time when you are older, which is a factor in determining premiums. However, the premium will not be adjusted higher due to a deteriorated health condition.
This is an excellent rider to have if you want to keep your coverage options open after you purchase the initial policy.
The biggest limitation with term life insurance is that it will come to an end at some point. Even if you can extend the policy, the premium will increase as you age. But if you add a conversion rider, you’ll have the option to convert the term policy to a permanent whole life policy.
The basic advantage of the conversion rider is that it will enable you to convert your term policy to whole life without needing to qualify medically. Your health will be based on whatever it was at the time the original policy was taken.
Most conversion riders impose limits on when you can make the conversion. For example, it may allow you to convert the policy at any time within the first 10 years. Or it may restrict conversion to certain anniversary dates over the term of the policy. In most cases, you will pay a higher premium for this option.
The conversion rider is a valuable addition if you believe you may want permanent coverage sometime in the future, and you don’t want your health condition to be a factor. But be aware that when you exercise the option, the premium will be based on your age at the time of the conversion, not the original policy date.
Waiver of premium rider
This rider will allow you to waive the premium on your life insurance policy due to unemployment. Premium payments will resume once you return to work.
It can be an excellent option to have, but it does have limits that may reduce its effectiveness. For example, there’s usually a waiting period. That might be something like two or three months, during which you will be required to make your payments. There’s also a set limit for how long the waiver will last, with 12 months being typical.
Another limit to be aware of is the terms of unemployment listed in the rider fine print. Most insurance companies will not honor the waiver if you were fired, and certainly not if you quit. They’ll usually have very specific language that will list what they consider to be acceptable causes for unemployment, and any required steps you’ll need to take to find a new job while you’re unemployed.
Why do life insurance riders exist?
If there were no life insurance riders all life insurance policies would look basically the same. Sure, there are various types of life insurance, like term, whole life, and variable life, but it would mean all consumers would need to work with the same basic policies.
Riders give consumers the ability to customize life insurance policies to fit their specific financial needs. This customization enables insurance companies to provide each consumer with a unique policy mix that’s both more flexible and accommodating for a greater number of people.
But a more practical reason for riders is that some are temporary. For example, you might add a 20-year term rider to a basic whole life policy to provide extra coverage while your children are young. Once your children reach adulthood, the need for the additional coverage will disappear. You can eliminate the term rider and lower the premium when the provision is no longer needed.
How can you use life insurance riders to your advantage?
Riders can be especially advantageous in special circumstances.
For example, let’s say you work in a hazardous occupation – perhaps one that has you on the road much of the time. Since you’re at greater risk of dying from an accident than from natural causes, you may decide to add an accidental death benefit with a double indemnity provision. Adding that type of rider will mean a $500,000 basic life insurance benefit will double to $1 million if you die in an accident.
Another example is if you own a business. If your business is fairly young and you have a lot of business debt, you may want to add a term rider to your basic whole life policy that will match the amount and term of the debt. Should you die before your business debts are paid, the term policy would pay the debts, leaving your beneficiaries to inherit the business debt-free.
Still another common example is with term life insurance policies. Most people choose term life because it’s far less expensive than cash value policies, like whole and variable life insurance. But if you don’t like the idea of paying out thousands of dollars in premiums over the term of the policy, and having nothing to show for it at the end, you can fix that problem by adding a return of premium rider. It will reimburse you for (most) of the premiums you’ve paid for the policy, plus an agreed-upon interest rate.
Who should pay attention to life insurance riders?
Let’s start by saying the only people who shouldn’t pay attention to life insurance riders might be single people who have no dependents. But there may even be compelling reasons for that person to consider certain riders, certainly an accelerated death benefit or a critical illness rider if there’s a family history of major diseases.
Virtually everyone else should want to know about the riders offered by their life insurance company.
Examples (and the rider that will apply) include:
- Parents of young children who will need a larger amount of coverage while their children are young (term rider).
- Anyone who has a large mortgage or other substantial debt that they want paid off while preserving the basic death benefit for their beneficiaries (term rider again).
- A consumer who takes a term life insurance policy but may want to switch to permanent coverage at a later date (conversion rider).
- Anyone who is concerned with the prospect of extended unemployment and the inability to pay life insurance premiums (waiver of premium).
- Someone who takes a term life insurance policy but wants some kind of cash benefit when the policy expires (return of premium).
- Anyone who takes a term life insurance policy but wants to be sure they’ll be able to renew the policy at the end of the term (guaranteed renewability).
These are just a few of the examples of who should pay attention to life insurance riders.
Life insurance riders enable you to customize a basic life insurance policy to fit your own personal needs and preferences. You should request a list of riders offered by any insurance company you’re making an application with and weigh the cost of the rider versus the benefit it will provide.
In most cases, you’ll find the rider is a small price to pay for the benefit you’ll receive. But you owe it to yourself to investigate all the rider options a company has available. And if you’re in doubt, it’s generally better to have a rider in place if you’re even remotely concerned about a particular risk factor in your life, whether it’s related to health, employment, or some other financial need.