Life insurance provides the foundation of coverage which can guarantee a source of funds upon the death of the insured. While it is a wise purchase, the policy on its own may not be adequate to serve all needs. This is where life insurance riders come into play.
These extra provisions allow policyholders to customize their insurance to suit their specific needs.
What Exactly Is A Life Insurance Rider?
A standard life insurance policy includes some flexibility in its terms of the type purchased and coverage amount. A rider extends its scope to cover additional scenarios such as long-term care or disability income.
Most riders will add to the cost of the insurance. However, some types, such as the accelerated death benefit rider, often do not increase the premium of the policy.
Many riders have specific conditions and limitations which must be met. The types available will also vary by the insurance company.
It will behoove potential buyers to learn how the different insurers define terms, such as disability and age of maturity for children. With riders which pay out early, it’s essential to learn how they may impact the death benefit paid to beneficiaries.
The top five most common riders are the:
- Disability Waiver of Premium
- Children’s Insurance
- Critical Illness
- Disability Income
- Accidental Death
What is the Disability Waiver of Premium Rider?
The disability waiver of premium rider is one of the more common types of add-ons.
As the name implies, this protection allows the policyholder to forgo making premium payments if he should become disabled and unable to work. It’s worth noting the insured must pay the premiums or else the insurance will lapse and the coverage will cease.
This rider ensures this scenario doesn’t occur since it will cover the cost of premium payments until the insured is able to work and make payments again. This coverage is invaluable, considering the hardship of losing a breadwinner’s income on the household. Insurance companies vary on their specific definition of disabled as well as age limitations.
What is the Children’s Insurance Rider?
The children’s insurance rider recognizes the collateral costs of losing a child.
While there typically is no loss of income, the loss comes at a high emotional cost. Its purpose is to offer financial assistance to the grieving family as they cope with funeral and burial expenses. The death benefit will also provide income replacement for the family for the time taken off work.
These riders are in force until a child reaches maturity, usually age 25. The policyholder can opt to convert it into permanent insurance usually without a medical exam. The coverage amount varies. Also, some insurance companies may require a health profile of children covered by a rider. It may affect the cost of this added protection
What is a Critical Illness Rider?
The critical illness (a type of accelerated death rider) can provide much-needed comfort at a difficult time for the insured and his loved ones. The rider allows the individual to receive a portion of the policy’s death benefit to pay for medical expenses if he is diagnosed with a terminal illness.
With some insurers, the payout may be the lump sum of the policy’s face value.
This rider is typically offered at a nominal premium or even at no cost. It’s essential to realize the amount paid to the insured will be subtracted from the death benefit to the beneficiaries. It may also include interest.
As with other general terms, the definition of terminal illness will vary with the insurance company.
What is a Disability Income Rider?
The disability income rider makes good economic sense for both individuals and businesses. The protection provides a monthly income in case the insured becomes disabled and cannot work. This rider can help a family avoid financial hardship.
The policy will stipulate the amount paid and for the length of time it will occur. There are several likely caveats.
Some insurance companies will offer this benefit only if an accident caused the disability. Others will cover it for both illness and an accident. As with other riders, the definition of disability will vary with the insurers. Some may pay following total disability whereas others may place limitations on the amount or time an individual is paid.
What is an Accidental Death Rider?
The accidental death or double indemnity rider pays the beneficiaries twice the face value of a life insurance policy in the event the insured dies as the result of an accident.
Some insurance companies may extend this benefit if the insured is a victim of dismemberment or a loss of a limb. Accidents are the fourth leading cause of death in the United States.
Some ambiguity exists with this rider in the definition of an accident and its role as the primary cause of death. If affordable, it makes good sense for a policyholder to add this provision, especially if he has dependents. Doubling the death benefit will help ensure the financial security of his family.
Other Types of Life Insurance Riders
These are some of the most common types of life insurance riders, but it is not an exhaustive list.
Here’s a few more:
- Guaranteed Insurability Rider
- Cost of Living Rider
- Long Term Care (LTC) Rider
- Return of Premium Rider
- Term Conversion Rider
- Charitable Giving Rider
Guaranteed Insurability Rider
Many add-ons provide additional protection for the insured and his loved ones. For example, the guaranteed insurability rider or additional purchase option makes sure a policyholder can renew his insurance at the end of the term. It doesn’t require proof of insurability such as an exam.
This rider is an excellent choice for a business owner in a buy/sell agreement uses life insurance as a funding source. He can increase his coverage without proving insurability either. He can then match his insurance coverage with the increasing valuation of the business as per the buy/sell agreement.
The ability to change it ensures adequate funding if a trigger event occurs.
Cost of Living Rider
Other add-ons are appropriate for specific situations. The cost-of-living rider keeps the amount of life insurance coverage current with inflation based on the Consumer Price Index.
Long Term Care Rider
Others include the long-term care rider to help cover the costs of a nursing home or home care with a percentage of the policy’s face value rather than the lump sum.
The family income ensures a reliable source of funds with pre-determined monthly installments instead of a single lump-sum payment. There are also funeral and burial riders to cover these expenses.
Return of Premium Rider
And if the insurer should live past the term of the life insurance policy, he can get his money spent on coverage back with a return of premium rider.
Term Conversion Rider
A term conversion rider offers an excellent option for younger people who cannot afford the higher cost of a permanent policy. The rider allows for a less expensive term life insurance policy to convert to a permanent one, given specific requirements are met. This protection provides the best of both types of life insurance policies with affordability and superior coverage.
Charitable Giving Rider
Other riders serve as adjuncts to estate planning such as the charitable giving rider. This rider allows the policyholder to name a charity to receive a small additional percentage of the face value as a donation on his behalf. The amount varies between 1 and 2 percent. These riders typically don’t increase the base premium cost and offer a great opportunity to leave a lasting legacy.
Life insurance riders give policyholders the flexibility to customize their policy to fit their needs and adapt to the changes in their lifestyle. They can provide individuals and businesses with the peace of mind of having coverage which will safeguard their future.
If a basic policy doesn’t offer what a buyer needs, the chances are a rider will fill in the gaps.