Life insurance riders are like à la carte add-ons for a life insurance policy.
They can add a lot of bells and whistles to your coverage, but in many situations they are not worth the cost.
This post describes the most popular life insurance riders available to consumers and two riders that many companies offer for free, but no policy should be without.
Quick Article Guide:
- Accelerated Death Benefit Rider
- Child Rider
- Long-Term Care Rider
- Another Life Rider
- Term Conversion Rider
- Return of Premium Rider
- Waiver of Premium Rider
- Double Indemnity Rider
- Find the Life Insurance That’s Right for You
The most common life insurance rider is an accelerated death benefit or ADB rider. With an accelerated death benefit rider, the insured can collect a portion of their policy’s death benefit if they are diagnosed with a terminal illness like cancer.
With many companies, you can access up to 75 percent of your face amount, and this money can be used however you wish. While some people opt for better care, others have used this benefit to take the family on a once-in-a-lifetime vacation, pay off their mortgage, or set aside money for their children’s education.
If you pass away before your term ends, your beneficiary will still receive the remaining portion of your policy’s death benefit. You do not have to repay this money if you outlive your policy.
Our Verdict: We always recommend purchasing a life insurance policy with an ADB rider, even if the policy is a few dollars more a month than a comparable alternative.
If something were to happen to your child, a child rider would serve as a small life insurance policy for them, usually to cover unforeseen medical bills or burial costs.
Most life insurance companies offer $50,000 to $100,000 of coverage to children under the age of 18, and no exam is required for approval. While these riders offer convenience, they also offer less benefits to the insured and they tend to be more expensive.
As an example, juvenile policies like Gerber’s Grow Up Plan allow your child to continue their life insurance as they enter adulthood. With a child rider, on the other hand, their coverage will end when your term expires or by the age of eighteen with many companies.
Our Verdict: In most situations, buying a juvenile policy for your child is a better option than purchasing a child rider with your policy.
If you become disabled and your policy has a long-term care rider, you’ll have the option of accessing a portion of your policy’s death benefit to help with long-term care costs.
Most life insurance companies determine that a person is disabled when their primary care doctor feels that they are unable to complete two or three of the six activities of daily living or ADLs.
The six activities of daily living (ADLs) are generally defined as:
More than 52% of Americans over the age of 65 will require some from of long-term care during their lifetime and this number is expected to grow. The U.S. Department of Health and Human Services offers the following definition for long-term care insurance:
“Long-term care insurance policies reimburse policyholders a daily amount (up to a pre-selected limit) for services to assist them with activities of daily living. You can select a range of care options and benefits that allow you to get the services you need, where you need them.”
Our Verdict: This is a great benefit to have, but it can also expensive. We’ve explained more about long-term care insurance and long-term care riders here.
Similar in function to child protection riders, another life riders allow you to extend your life insurance to another adult in your family, usually a spouse. These riders are purchased relatively infrequently because for most healthy adults it is less expensive for them to purchase their own policies.
However, another life riders are extremely helpful if someone in your family is in uninsurable. With these policy’s, the “risk” is spread between both applicants, which keeps your cost down. This strategy also decreases the chances of the insurance company declining your application.
Many companies do not offer another life riders, which is why working with an independent agency is important. At JRC we work with more than 50 companies and we know which companies offer the riders you need to supplement your coverage.
Our Verdict: If you and your spouse are in fair or better health, we recommend applying for your own policy first. If you unable to qualify on your own, purchasing a policy with another life rider could be your best option.
Term life insurance policies expire after a fixed number of years. When this happens, you will need to purchase a new policy, pay a much higher rate, or go without coverage. While buying a new policy this seems easy enough, if your health has taken a turn for the worse, it might not be a possibility.
If your policy offers a term conversion rider to convert all or part of your term policy to permanent life insurance. Term conversion riders are accessible for a set time frame before your policy ends, or up to a specified age (usually 70 or 75).
The reason term conversion riders are useful is because most people need more life insurance while they are younger, and less life insurance when they get older. Ideally, you pay your mortgage, send your kids to college, and gain financial stability as you age. To avoid overpaying now for life insurance you might need later, you can add a term conversion rider to your front-loaded term policy.
For example, we recently helped a woman who had breast cancer, and her term policy was set to expire. She had the looming reality of being uninsured for at least a few years while she underwent breast cancer treatment.
Luckily, the term insurance policy that she had purchased almost 20 years earlier offered a conversion option. With our help, she was able to convert her $500k term policy into a $100k whole life policy. This policy will provide her with coverage for the rest of her life, and she will not have to worry about a lapse in her current coverage. She was even able to qualify for her same rate class as when she had first bought her term policy before she was diagnosed.
This is a significant benefit, but it is not without a steep rise in cost along the way. A return of premium rider will usually double the cost of a standard term policy—understandably so, considering the insurance company pays if you die and pays if you live.
A return of premium rider can essentially be a ticket to free life insurance if you are healthy and your policy expires sooner than you do. But understand that you should have substantial savings to account for the higher policy cost.
Also note that a return of premium rider is very easy to lose. You need to make your premium payments on time every month, or the rider will quickly become void.
Fox Business explores the question of whether a return of premium rider is a better investment than a basic term policy with the difference invested elsewhere:
“To find the answer, subtract the annual premium for a basic term policy from the annual cost of a return of premium policy. The difference is how much you would have to invest each year during the insurance term. Then calculate what annual rate of return you’d need on that money to beat the amount you’d get back from a return-of-premium policy. Remember, money from the return of premiums is tax-free, but your own investment returns are taxed. In some cases (depending on age, sex, tax bracket and other factors), you’d need to get more than a 7% rate of return on your investment to beat the return of premium policy.”
If you become disabled for more than 6 months, a waiver of premium rider will transfer the monthly payment responsibilities for your policy from you to the insurer.
The tricky thing about these riders is that each insurance company has a different definition of “disabled,” and the contract language can be confusing to interpret—again, an example of why you should work with an experienced independent agent who understands the nuances of these riders both as a product and as they apply to different insurers such as Prudential, Liberty Mutual, Banner Life, etc.
Waiver of premium riders usually expire at age 60 or 65 because they are meant to provide financial relief if you are unable to work and bring in a steady, viable paycheck. Investopedia makes an important note about accessing a waiver of premium rider:
“Many waiver of premium riders include a waiting period before the benefits can be claimed. The policyholder may need to be deemed disabled for six months before the premiums will be waived. Other factors may also be required, such as the policyholder may need to be, aside from the newly acquired disability, considered of sound enough mind and body that it would be reasonable to expect he could be an integral member of the workforce.”
We saved perhaps the most complicated rider of all for last: the double indemnity. In life insurance, double indemnity basically states that your beneficiary will receive a larger payout if you die from an accident.
Financial Web explains:
“With a traditional life insurance policy, your beneficiary is going to receive the face value of your policy when you die. With life insurance double indemnity, you can actually create a larger payment for them if you die from an accidental death…Less than 5 percent of deaths are ruled an accident…Since there is a low likelihood of accidental death, insurance companies can usually sell this additional coverage for a very nominal fee. This type of coverage can be very beneficial to individuals that work in dangerous industries in which they could die accidentally.”
As you can probably guess, the gray area between accidental and natural death is a major complication in double indemnity, and again goes back to each insurer’s definition and contract language.
At JRC Insurance Group, we specialize in white-glove life insurance consultancy. We’re not concerned about sales quotas or competing insurance companies; we exist solely to help you find the right life insurance policy for your needs.
The process starts with gathering favorable and affordable policy options based on some very brief information that you provide us. We will then walk you through the application process and secure your policy, along with any riders you might wish to add.
Ready to get started? Call us toll-free at: 855-247-9555, or you can request a free instant online quote here.
Cliff is a Managing Partner and Co-Founder at JRC. He has helped thousands of families of businesses with their life insurance needs since 2012 and specializes with applicants who are less than perfect health. In his spare time he enjoys spending time with family, traveling, and the great outdoors.