Life insurance riders are additional provisions that can be added to term and whole life policies in order to customize the way the policy works. Below we discuss the pros and cons of each rider, what life insurance types the rider works best with, and review some tips and tricks for avoiding potential pitfalls.
Keep in mind that different insurers like to call the same riders and life insurance products by different names. This can be confusing, but typically the way the product works will be consistent between insurers.
Renewability Rider (Guaranteed Insurability Rider)
A renewability rider allows you to renew a term policy, typically this means you will be allowed to renew (without “evidence of insurability”) but at a higher premium.
Convertibility Rider (Term Conversion Rider)
A convertible policy or policy with a convertibility rider allows the policy holder the convert a term life policy into a whole life policy when the term policy. Typically there will be a time-frame in which the policy can be converted. There can be extra payments due, or the whole policy may not be convertible depending upon the insurer and rider.
A term rider can be added to a term or whole life policy to create extra coverage for a specific duration of time. This can be a smart move when extra protection is needed for a short amount of time.
Spouse Insurance Rider (Spousal Rider)
A spouse insurance rider allows for a spouse to be included as on the main policy.
Child Protection Rider (Child Rider)
A child rider allows for a child to be included on the main policy. Can include the option for being converted into a whole life policy without “evidence of insurability” upon a certain age.
Other Insured Rider
An other insured rider simply requires an insurable interest on a person. This can be used to insure a spouse or family member, but can also be used to insure a business partner for example.
Family Income Benefit Rider
A family income benefit rider allows for regular monthly payments to beneficiaries, rather than a lump-sum payment, upon the death of the insured. This rider can help to make sure a family is supported consistently throughout time and avoid potential tax issues with receiving lump-sum taxed benefits or cash value.
A withdrawal rider allows the insured to withdraw accumulated cash value. There is a a penalty for withdrawing before a certain age (typically retirement age) and withdrawing cash value typically results in a reduction to the policies payout upon death as well.
Return of Premium Rider
Some higher premium term policies allow a “return of premium” if no claim has been made by the end of the “term” of the contract. Typically you’ll have to continue the policy through the whole term to claim the return. Some contracts allow the return of all premiums, others allow the return of only the initial premiums (not the cost of the return of premium rider).
Waiver of Premium Rider
If a policy holder is “totally disabled” this rider waives the need to make premiums. This can be a major benefit if there is only one main source of income in the family. This can protect against a policy lapsing in the later stages of life where one’s ability to pay higher premiums may be diminished. Make sure to understand what qualifies as “disabled” and understand exclusions.
Accidental Death or Double Indemnity Rider
This rider pays a double death benefit in the event of a qualifying accident. For example if the policy holder dies due to bodily injury the policy will pay out double the death benefit. As would be assumed only certain “accidents” trigger the double benefit rider, so make sure to read the fine print and understand exclusions.
Long-Term Care Rider
A rider that replaces the need for long-term care insurance. This offers monthly payments (living benefits) in the event that the policy holder needs long-term care.
Accelerated Death Benefit Rider
An advance death benefits up to a percentage (defined in contract, but typically 25 – 50%) in the case of terminal illness (12 months or less to live). This money is typically loaned by the insurer from the death benefit with interest. Thus this can lead to a lower payout upon the death of the insured. Check fine print for what counts as a “terminal illness” and make sure to understand exclusions.
Critical Illness Rider
A Critical illness rider is similar to the accelerated death benefit rider, however the main difference is in the types of diseases that trigger the provision and timeframes.
Disability Income Rider
Provides advanced death benefits in the case of disability. This is similar to a waiver of premium rider as it triggers upon disability, but provides advanced payments rather than the wavier of premium.
Annuity Income Rider
A rider attached to a life annuity account to ensure payouts. It can limit the growth rate of an annuity.