What Are Life Insurance Policy Riders?
A life insurance rider is a special policy provision that adjusts the coverage of the policy or provides additional coverage. Because these provisions are not included in the original policy, they must ride along with the policy by being attached to it. Riders are typically offered at the time of application, and you will generally pay an additional premium for any riders attached to your life insurance policy. There are many different types of riders. You should consult additional resources to determine the best combination of policy provisions, options, and riders for your specific situation.
Accelerated Benefits Rider
Sometimes called a living benefits rider, the accelerated benefits rider allows you to collect part of your death benefit before you die in the event of a terminal illness, catastrophic injury, or permanent confinement to a nursing home. You may use the accelerated payment to pay for medical expenses and care required because of your illness or injury. If you require long-term care, your policy may allow you to take an advance to pay for care in a skilled, intermediate or custodial care facility.
You can typically take an accelerated payment of 25 percent or more of your life insurance policy's death benefit. Various factors may affect the maximum amount of your withdrawal, including your expected mortality, any outstanding policy loans, and administrative fees. Accelerated payments may be taken as installment payments or in a lump sum. Proceeds paid out under this rider will reduce the amount your beneficiary receives upon your death.
Tip: If your benefit is paid out due to your terminal illness and your death is expected to result within 24 months, this payment would be considered a qualified accelerated death benefit. If that is the case, your benefit may be received free of any income tax.
Accidental Death Benefit Rider
This rider provides that an additional death benefit will be paid out to your beneficiary if you, as the insured, die as a result of an accident. The additional benefit paid to your beneficiary is usually equal to the face amount of your life insurance policy and is therefore frequently referred to as double indemnity. Typically, there is an additional premium charge for this rider.
Specific conditions must be met for this type of rider to pay out the benefit. Different insurance companies have different definitions of accidental death, so it is important to understand this term in the context of your specific policy. In most cases, this rider only applies if you die in an accident or as a direct result of and within a specified time after an accident. The time permitted between the accident and death may vary, but it is typically 90 days. Certain causes of death are excluded by most accidental death riders. Most commonly, death that is caused by self-inflicted injury, injuries sustained in military service during wartime, injuries received while committing a crime, or injuries received as a result of riot or insurrection are excluded. If you died as a result of any one of these situations, the accidental death benefit would probably not be paid.
With this rider, you have the option to increase the death benefit of your policy to match increases in the cost-of-living index. However, if you choose to increase your death benefit, this will typically also mean an increase in your premium. Decreases in the cost-of-living index will not decrease your death benefit.
Example(s): If the death benefit on your insurance policy is $100,000 and there is a 2 percent increase in the cost-of-living index, you would have the option of increasing the death benefit on your policy by 2 percent to $102,000.
Disability Income Rider
The disability income rider provides that you will receive a regular monthly income if you become totally and permanently disabled. The amount of the monthly payment is typically based on the face amount of your life insurance coverage (for example, $10 per month for every $1,000 of insurance). In addition, most disability income riders include a waiver of premium provision (see below). Certain causes of disability are not covered under the disability income rider. Most commonly, disability that results from self-inflicted injury, injuries received in military service during wartime, or injuries sustained while committing a crime are excluded.
Caution: Be aware that not all insurance companies use the same definition of totally and permanently disabled. Make sure you understand how your insurance company defines this term.
Long-Term Care Rider
The long-term care rider allows you to use the death benefit to pay for long-term care expenses you may incur. Often, the policy may allow the long-term care benefit to exceed your policy's death benefit. This may be done either by increasing the long-term care benefit by a multiple of the death benefit, such as two or three times the death benefit, or by extending the number of months over which you can receive long-term care benefit payments such that the total payments available is greater than the death benefit. In either case, however, long-term care payments will reduce the death benefit on a dollar-for dollar basis.
Guaranteed Insurability Rider
The guaranteed insurability rider gives you the right to buy additional life insurance at certain times without having to provide proof of insurability to your life insurance company. For example, the rider might permit you to purchase additional insurance at age 30, 35, and 40. With most insurance companies, the guaranteed insurability rider only allows you to buy additional insurance coverage until you reach a certain age (typically 40). You will usually pay an additional premium to have this rider attached to your policy. The premium for any additional insurance coverage purchased under the guaranteed insurability rider would be based on your age at the time of the purchase.
Tip: This rider can be particularly useful if you are in a high risk group for any disease that might make you uninsurable.
If you have an insurance policy on the life of your child, you are the policyowner and you typically pay the premiums. If you were to die, premium payments would probably cease, and the policy would lapse. By attaching a payor rider to a child's life insurance policy, you can ensure that the policy would remain in force in this situation.
The payor rider provides that if the person who pays the premiums dies or becomes disabled before the child reaches a certain age (usually 21 or 25), the insurance company will waive the premiums until the child reaches that age. Because this rider exposes the insurance company to greater risk, you will have to pay an additional premium to have this rider attached to a life insurance policy. The payor typically must provide proof of insurability before the insurance company will issue a payor rider, since the payor is in effect being insured for the amount of the premiums that might be waived.
This rider provides that if you (the insured) die within a certain time after purchasing the policy, the insurance company will pay an amount equal to the total premiums paid, in addition to the face amount of the policy. The specified time period is typically 10 or 20 years. In effect, you are purchasing an increasing term rider (see below), and your premiums will increase accordingly.
Term riders allow you to attach term insurance coverage to your permanent insurance policy. If you were to die during the life of the term rider, your beneficiary would receive the current face amount of the term coverage in addition to the death benefit on your permanent policy. There are several different types of term riders, which are explained separately.
Tip: There are two important rules regarding term riders. First, they can be used only in combination with permanent policies. In other words, you can't attach a term rider to a term policy. Second, the permanent policy must have a premium payment period that is at least equal to the length of the term rider.
With a level term rider, the face amount of the term coverage stays the same throughout the life of the rider. When the rider expires, the term coverage ends. Level term riders are generally written for 5, 10, 15, or 20 years. The face amount of the term coverage is typically no more than three or five times the face amount of your permanent policy, although this varies from one insurance company to the next.
The cost of the level term rider is typically less than you would spend on a separate term insurance policy. However, the rider can be used only in conjunction with a permanent policy. You will typically pay one premium that covers both the cost of the permanent insurance and the cost of the term rider. When the rider expires, your premium will decrease to reflect the decrease in coverage. This type of rider may be appropriate when you need additional life insurance for a specific period of time (e.g., until your children graduate from college).
With a decreasing term rider, the face amount of the term coverage starts out at a certain level and decreases at predetermined intervals throughout the life of the rider. When the rider expires, the term coverage will have decreased to zero. Like level term riders, decreasing term riders are generally written for 5, 10, 15, or 20 years. The initial face amount of the term coverage is typically no more than three or five times the face amount of your permanent policy, although this varies from one insurance company to the next.
Example(s): You might purchase a 20-year, $10,000 decreasing term rider. The initial face amount of the rider would be $10,000 and would decrease steadily over the life of the rider, perhaps decreasing by $500 each year. At the end of 20 years, the face amount of the term rider will have decreased to zero.
When you attach a decreasing term rider to your insurance policy, you will typically pay one premium that covers both the cost of the permanent insurance and the cost of the term rider. When the rider expires, your premium will decrease to reflect the decrease in coverage. Because you might be tempted to stop paying premiums on the rider during the final years (because the coverage amount is so small), insurance companies have developed two variations on the decreasing term rider.
Decreasing Term with Accelerated Premiums
This is a variation on the decreasing term rider. Your insurance company may require you to pay the premiums on a decreasing term rider over a duration that is less than the full life of the rider.
Example(s): You might purchase a 20-year $10,000 decreasing term rider. The insurance company might require you to pay the premiums on the rider during the first 16 years. The term coverage would continue (on a decreasing basis) for the last 4 years, but you would no longer be paying premiums on the rider.
Decreasing Term with Accelerated Benefit
This is also a variation on the decreasing term rider. With this type of rider, the face amount of the term coverage would decrease in the normal way for a specified number of years. Then, for the remainder of the term coverage, the face amount would stay level.
Example(s): You might purchase a 20-year $10,000 decreasing term rider. The face amount might decrease over the first 15 years, until it reaches $2,000. For the remaining 5 years of the rider, the face amount would remain at $2,000. When the rider expires, the term coverage would end.
With an increasing term rider, the face amount of the term coverage starts out at a certain level and increases at predetermined intervals throughout the life of the rider. The amount of the increasing coverage may be tied to the increase in accumulated cash value or to the sum total of premiums paid. Because your insurance coverage amount increases each year, your premium payments would likely increase each year, as well.
The waiver-of-premium rider provides that your life insurance company will pay your premiums for you if you become totally and permanently disabled. In determining whether a disability is total, the insurance company may consider whether you will be able to return to your usual occupation or whether you will be able to engage in any profitable work. In determining whether the disability is permanent, the insurance company may require a waiting period of 3 to 6 months after the injury, during which time you must continue paying your own premiums. If the waiting period expires and you are still disabled, your disability will be considered permanent. Premiums you paid during the waiting period will be refunded, and the insurance company will begin making your premium payments.
Tip: The definition of total and permanent disability varies from one insurance company to the next, so it is important to understand how your insurance company defines this term.
You will pay an additional premium for this rider, since it exposes the insurance company to more risk than if the rider were not included. While the insurance company is paying your premiums, your life insurance policy continues in force as though you were paying the premiums yourself. Death benefits, cash values, and dividends (should you have this type of life insurance policy) will continue as long as your life insurance premium is paid. If, at some later date, you no longer fit the definition of completely and totally disabled, you will simply begin paying your premiums again. You are not required to repay premiums paid for you by the insurance company
This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.
The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that focuses on transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.
The Retirement Group is a Registered Investment Advisor not affiliated with FSC Securities and may be reached at www.theretirementgroup.com.