Life Insurance Riders: Avoid These 12 Features At Your Peril (2021)

Life Insurance Riders Cover

A life insurance rider is an “add-on” feature you can purchase to add coverage and/or flexibility to your policy.

In this guide, we’ll look at 12 types of life insurance riders, both common insurance riders that are offered by the vast majority of carriers to less common riders that you may need the help of a life insurance agent to find.

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Common Life Insurance Riders

Why would you want to add features to a life insurance policy?

A basic life insurance policy includes features that are relevant to the vast majority of the public.

But for features that are relevant to only a small group of people, it makes more sense to offer them as an add-on feature.  If companies added these feature to every one of their insurance products, every policy holder would have to pay higher premiums for features they do not need.

Let’s look at the most common life insurance riders and the consumer needs that they satisfy.

1. Disability Waiver Of Premium Riders

What happens if you stop making your premium payments?

According to any standard life insurance contract, your policy would expire and you would have to reapply for coverage if you wanted to have your policy reinstated.

But what if the reason you missed your premium payments was because you had gotten disabled? Not only has your health declined, making your life insurance policy more valuable, but at the same time, your policy has been pulled out from under you.

Insurance companies have tackled this exact scenario in the disability waiver of premium rider.

As the name suggests, if you get disabled, your future premium payments are waived. (The policyholder must be disabled for a specific period, e.g., six consecutive months, before the premiums waiver goes into effect.)

This waiver of premium rider can be added to any policy type, from term life insurance to permanent life insurance (such as whole life or universal life).

What Conditions Does This Rider Cover?

The waiver can also be useful when a medical condition (e.g., illnesses that require significant hospital stays) prevents the insured from working in his or her traditional capacity.

Qualifying conditions will vary by policy, and in some cases, by occupation.  Regarding the latter, the rider will stipulate that the condition only has to affect the insured’s occupation and not be a disability that would prevent them from being employed in other fields.

Waiting Periods

Finally, note that most of these waivers have a waiting period (similar to the incontestability clause that is found in nearly all life insurance policies.)

If the policyholder is disabled or diagnosed with a qualifying illness during this waiting period, the policyholder receives a full refund of premiums paid; however, they will not receive payments in the amount of their death benefit.

Going forward, the policy is terminated and the policyholder no longer has life insurance coverage. 

Accordingly, their beneficiaries are no longer entitled to a death benefit payout and the policyholder must re-apply for coverage (if they are even able to get coverage with their disability).

2. Accelerated Death Benefit Riders

The accelerated death benefit (ABD) rider is an extremely popular feature in life insurance contracts. (So much so that many life insurance companies now include an accelerated death benefit rider in your policy at no additional charge).

This rider allows for an early payout of your death benefit (i.e., while you’re still living).

Your life insurance company pays out your death benefits in portions to help you with expenses during certain unexpected times of hardship.

There are several types of ADBs, corresponding to the qualified circumstances that trigger the early payout, which we’ll go through below.

Terminal illness Riders

A terminal illness ADB rider addresses situations where the insured doesn’t have much time left to live.

If a doctor confirms that you are terminally ill and have less than 6-12 months to live, you  are eligible for a payout.  The amount received varies by policy, but can be as high as 80% of the policy’s face amount.

This payout can be used to cover end-of-life care, such as hospice care, nursing home residency, or hiring a private caretaker.

A particularly compassionate feature of terminal illness riders is that the payout is often not restricted to paying for medical expenses.

Some insurers suggest that the insured uses the living benefit payout to pay for a vacation or other activity that makes their final days as easy and enjoyable as possible.

Because you’re tapping into the death benefits while still alive, ADB riders are often called “living benefit” riders and are paid out as needed instead of in a lump sum.

Critical Illness Riders

Critical illness riders enable early payouts of the death benefit to cover treatment for specific illnesses detailed in the policy contract. These conditions often include heart attacks, cancer, strokes, kidney failure, ALS, and other life-threatening conditions that entail significant medical bills.

The payout amount is subtracted from the death benefit, so when you die, your beneficiaries will receive whatever portion of the death benefit remains.

3. Long-Term Care Rider

The long-term care rider allows you to create a hybrid life insurance and long-term care insurance policy.  (This rider is often also called a “chronic illness rider.”)

This rider is similar to an accelerated benefits rider in that your life insurance company pays out your death benefit early.  In this case, the rider triggers when you need long-term care.

How does the company determine when you need long-term care?

You qualify if you are no longer able to perform two or more of the six Activities for Daily Living (ADL):

  • Eating
  • Bathing
  • Getting dressed
  • Toilet use
  • Transferring positions (getting in and out of bed or a chair without assistance)
  • Maintaining continence

Finally, a medical professional must certify that your disability is permanent.

Unique Benefits

LTC insurance riders can be expensive, but they include a unique and valuable feature:

LTC riders can offer benefits in excess of your policy's face amount. That is, if your expenses exceed the value of your original death benefit, your policy keeps paying for your care until you die.

4. Accidental Death Benefit Riders

While this rider may look the same as the Accelerated Death Benefit Rider at first, they are in fact very different.

Accidental Death Benefit Riders supplements the coverage of your original policy by providing an additional payout to the policy’s beneficiary if the insured dies as the result of an accident (such as a car accident, fall, or drowning, among many others).

This rider’s payout typically equals the amount of the death benefit, meaning that the total payout to the beneficiary would be 200% of the policy’s death benefit!

5. Term Conversion Riders

Term conversion riders do exactly what the name advertises.  They allow you to convert your term life insurance policy into a whole life insurance policy.

The amount of time during which you can convert varies by policy.

Like accelerated death benefits riders, this rider has become so popular that many insurance companies include them as a standard policy feature.

With this rider, you can convert policies without going through underwriting again.  You therefore avoid a new physical exam, which may uncover new health conditions that would increase your premiums.

Why Are These Riders Popular?

Why do people value term conversion riders so highly?

Often, as people age, they have fewer financial obligations.  For example, they pay down debts or have fewer dependents.  This is why term life insurance is often enough protection.

However, if it turns out that you’ll have financial responsibilities (e.g., you have a disabled child) after your term ends (or if the cash value functions of whole life policies appeal to you), a term conversion rider can provide valuable flexibility.

6. Return of Premium Riders

One of the newer riders on the life insurance scene is the return of premium rider.

Although, some life insurance companies may write specific policies that already include the built-in benefit of a return of premium rider.

How does a return of premium rider work?

If you are still alive when your term life insurance policy expires, your insurance company will return the premiums you’ve paid over the life of the policy.  If you die during the term, the company pays out your death benefit but keeps the premiums you’ve paid to date.

Return of Premium rider are not a free lunch!

While this type of policy may seem like a no-brainer, remember that there’s no free lunch!

A policy with a return of premium rider are considerably more expensive than a standard policy.

For example, while a standard 20-year term life insurance policy might have monthly premiums of $50 per month, the equivalent policy with a ROP rider might be $300 per month. This $250 / month difference equates to $3,000 per year and $60,000 over the life of the policy.

While you receive this sum back at the end of your term, you lose the interest you would have received if you invested this money in stocks, bonds, or other asset classes.

Depending on where you invest this money, this loss could be far more than $60,000 over your 20-year term!

Less Common Life Insurance Riders

The following riders are less common, implying that fewer customers have a need for their features.

In this section, we’ll go through each one of these six riders.

7. Child Life Insurance Riders

A child rider adds to your current policy a small amount of life insurance for your child.  It also covers them until adulthood, and in most cases, allows them to roll this coverage into a policy of their own.

This is an affordable way to give your family financial and mental breathing room if the awful tragedy of a child passing away occurs.

8. Guaranteed Insurability Rider

Guaranteed insurability riders are only found on permanent life insurance policies, such as whole life, variable life, or universal life insurance.

These riders give you the option of increasing your coverage without going through underwriting again.

This can useful if your financial obligations may increase in the future.

While you do not go through a new medical exam, and therefore, your insurance company cannot increase your price on the basis of new medical conditions, your premiums for the additional insurance will increase based on your then-current, higher age.

9. Spouse Life Insurance Riders

Similar to a child insurance rider, a spouse rider allows you to add coverage for your spouse to your existing policy.

The appeal of this rider is that the additional coverage will cost less than if your spouse took out a separate policy.

The downside is that the added coverage is typically very limited (~$100K) and may not provide sufficient coverage.

10. Charitable Giving Rider

With this rider, your insurance company adds an extra 1% to the face amount of your policy and donates it to charity if you pass away.

Fabric Life Insurance, an innovative new online provider, adds a charitable giving rider on every one of its life insurance policies at no additional cost to the customer.

Similar to organ donation, this allows you to give back to your community when you will no longer be able to physically.

11. Automatic Premium Loan Provision Rider

According to LIMRA, 6% of permanent life insurance policies lapse every year. 

For those unfamiliar, “lapse” means that a policy is terminated.  The most common reason for this is nonpayment of premiums.

With this rider, however, if you forget to make your premium payment one month on your permanent life insurance policy, this rider automatically takes a loan from the cash value of your policy in order to pay your premium.

12. Transfer of Insured Rider

This last rider is perhaps the least common, as it applies to a very specific situation.

Businesses often choose to insure against the death of a key employee.  However, they clearly no longer need this insurance if the key employee leaves the company.

With this rider, the policy owner is able to substitute one insured person for another at any point in the policy.

Wrapping Up

As you can see, life insurance riders are not nearly as complicated as they sound.

And they are certainly worth learning about because they significantly increase the utility of your policy in certain, often dire situations.

If you have any questions, please don’t hesitate to reach out.

Warm regards,
The GetSure Team

RJ

RJ

RJ is the Founder & Head of Content at GetSure. He is a licensed life, accident & health insurance agent, with over 10 years of experience in the financial services industry. He holds a B.S. in Applied Mathematics from Columbia University and an MBA from The Stanford Graduate School of Business.
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