Many consumers know that Term Insurance is the most affordable life insurance to purchase, but are not aware of the term insurance riders available that help you customize your policy to offer a better solution. An internet search will provide as many term insurance naysayers as proponents, but rarely do you find legitimate information about the many riders that are available.
Simply put, an insurance rider is an option that can be added to your normal term policy that can enhance your coverage to satisfy your individual needs. Depending on the insurer you select, the following riders can be added to your policy for an additional premium.
Accelerated Death Benefit (ADB)
Although considered a rider, the ADB is now found standard in many term policies. Even when added on by the applicant’s request, there is typically no additional charge for ADB. This valuable rider provides that the insurer will pay a portion of the death benefit in advance if the insured is diagnosed with a terminal illness. Although the ADB was created so that an insured would have the necessary funds to take care of final expenses, the insured can use the benefit in any manner they choose.
Your ADB amount is determined by the insurer and is typically 25 to 100 percent of the policy face amount (death benefit). Considered a “living benefit,” the insured can elect to accept the entire available benefit or an amount less than that and the remaining funds will be paid out to the designated beneficiary when the insured dies.
Example: Bryan is a real estate agent that has a $500,000 term insurance policy that has an ADB with a minimum benefit of $25,000 and a maximum of 60 percent. Bryan is diagnosed with stage-four pancreatic cancer and is expected not to live more than six months. Bryan decides to file a claim for his ADB and elects a 50 percent payout. When the claim is approved, Bryan would receive a lump-sum payment of $250,000 and the balance of the death benefit will be paid to Bryan’s beneficiary when he dies from cancer from his illness.
Waiver of Premium
The waiver of premium rider is a type of disability insurance that provides that your insurance policy will remain in force if you become disabled and unable to pay your periodic premium. This is a valuable term insurance rider that is offered by most companies. The terms of this rider will typically include a waiting period, period of coverage, and the insurer’s definition of disability. Many companies will remove the rider automatically when the insured reaches age 60 or limit payments only to age 65.
Since this rider differs among many insurers it’s important to know the terms of the rider in advance of purchasing your policy.
Long-Term Care Rider (LTC)
Many insurers offer a form of LTC coverage as a rider for an additional premium. In almost every case, the LTC rider is a variation of the accelerated death benefit rider. The amount of the LTC benefit is typically determined by the applicant’s age, gender, and health at the time the policy will be issued.
The rider is triggered when the insured is diagnosed with a condition that requires them to live the balance of their life in a nursing facility. Similar to the Accelerated Death Benefit, the insured would receive a lump-sum payment that is determined by the insurer and listed in the terms and conditions of the policy. If this rider is triggered and paid, the balance of the death benefit would be paid to the beneficiary upon the death of the insured.
Accidental Death Benefit
Often referred to as “double indemnity,” most insurers offer the Accidental Death Benefit rider that provides for the insurer to pay some multiple (usually double) of the death benefit if the insured dies as a result of an accident.
It’s very important for applicants to examine the terms and conditions of their policy to make certain they understand the insurer’s definition of an accidental death and also the maximum time period between the accident event and the death of the insured.
Guaranteed Insurability Rider
The guaranteed insurability rider is particularly important for young adults who understand that many life events will require them to carry additional life insurance in the future. With the guaranteed insurability rider, the insured is able to increase their death benefit at certain intervals without having to prove insurability. This means that although the insurance will be priced according to the new attained age of the policyholder, the additional amount of insurance is guaranteed since no medical underwriting is required.
Example: James is a 30-year-old realtor who is starting a family and decides to purchase a $750,000 life insurance policy to protect his family. James knows that it is very likely that he will purchase a home in the next five years and will need more insurance to cover the mortgage. If James elects the guaranteed insurability rider, he will be able to purchase the additional insurance without having to prove that he is healthy.
Most insurers that offer permanent insurance products as well as term insurance, will offer a Term Conversion privilege. This is an important feature that allows the policyholder to convert a portion or all of the term insurance policy to a permanent policy such as whole life or universal life. Although your rates will increase because of the new type of policy, you are not required proof of insurability at the time of the conversion.
Example: Janice purchased term insurance to cover her debt and mortgage when she was 30-years old. Now that she has paid down her debt and mortgage, Janice believes that she doesn’t need the amount of insurance that her term policy provides and she is concerned about outliving her coverage. Janice’s agent recommends that she convert at least half of her term insurance to a Universal Life policy since the premium is still affordable and the insurance is permanent. Even though Janice was recently diagnosed with diabetes, she’s not concerned about being rated up because her conversion privilege does not require medical underwriting.
Return of Premium Rider
The Return of Premium rider provides for the insurer to return all premiums paid to the insurer if you are still alive at the expiration date of your term policy. Although there is an additional cost for this valuable rider, if it is purchased by young and healthy adults, it is a great value.
Since the funds are considered as a return of after-tax dollars, the lump-sum payment is provided tax-free.
Example: John is a 30-year-old healthy male who can purchase term insurance at a very low rate and protect his family. He is a little concerned that the term insurance might be a waste of money if he outlives the policy. John’s agent explains that by purchasing the Return of Premium rider, he will receive the entire amount of premium dollars paid to the insurer if he outlives the policy. His agent also explained that he could invest the lump-sum payment into his retirement plan to make even better use of his money.
Additional Insured and Child Term Riders
Both of these riders are useful because they allow the insured to add a spouse and children to the term insurance policy. By doing so, the policyholder effectively creates an affordable family insurance plan. The additional insured can be added at an amount up to the limit of the insured’s coverage, and the children can be added by purchasing inexpensive units of coverage that insure all the children in the family and any future children that are born after the policy is issued.