Choosing your life insurance rider can be just as important as choosing between term vs whole life insurance or convertible vs renewable term life insurance. Life insurance has come a long way from being just a means to pay final expenses (i.e. funeral and burial costs) following a family death.
Today, life insurance policies can be used as estate and financial planning tools to protect your loved ones.
However, standard term or permanent life insurance may not fully address all your financial needs, leaving you with gaps in coverage. To address this demand for customized policies, insurance companies have developed a number of different life insurance riders.
What Are Life Insurance Riders (And Do You Really Need Them)?
Life insurance riders are types of supplemental coverage added to a policy.
They serve many functions, but a life insurance rider primarily provides you with additional protection for specific situations, outlined in the rider itself. Whether you need to add a rider depends on your financial situation, age, current health, medical history, and the types of coverage gaps you want to hedge against.
What Are The Best Life Insurance Riders?
While there are several kinds of riders that cover you under different circumstances, some of the more common life insurance riders that are available today include the following:
Disability Income Rider
When you have a disability income rider attached to your life insurance policy, your insurer will provide you a monthly income should you become disabled and unable to work. The rider will typically specify the amount of income to be received, as well as whether it will be paid for a set amount or time or for the entire length of your disability.
With some disability income riders, the stipend will be paid out only if you become disabled due to a work-related accident, while others will allow payment regardless of whether you became disabled due to a personal accident or illness.
Return of Premium Rider
A return of premium rider can be purchased and attached to a term life insurance policy. With return of premium riders, if you outlive the end of the policy’s “term period”, then you qualify to receive a refund of your paid-in premiums. This type of rider will increase your premiums and make the term life policy more expensive.
Waiver of Premium Rider
The waiver of premium rider can free you from having to make premium payments if you become ill or disabled and are not able to afford your life insurance anymore. With this option, the policy dividends will continue to be paid out (if applicable), and the cash value will continue to grow just as if the premiums were being paid by you.
In most cases, there will be a waiting period of several months before the waiver of premium can be applied. Also, you will be required to provide proof of your disability to the insurance company.
Accidental Death Benefit Rider
The accidental death benefit rider pays out a greater death benefit amount – on top of your policy’s stated death benefit – if you die due to an accident. However, your death must be a direct result of the accident.
Accidental death benefit riders are also referred to as “double indemnity” when the additional amount of benefit payout is equal to the original death benefit amount, causing your carrier to pay out double your original death benefit.
Similarly, an accidental death benefit rider pays out for dismemberment, meaning that you will be able to file a claim for loss of a limb or sight.
Guaranteed Insurability Rider
A guaranteed insurability rider, as the name implies, guarantees that you are able to renew your term life insurance policy at expiration without having to provide evidence of insurability, regardless of your current health. However, guaranteed insurability is usually offered up to a certain age, depending on the insurance company.
Furthermore, GI riders also allow you the option to buy more life insurance with no underwriting. This means you are instantly approved for a higher death benefit and additional coverage.
Accelerated Death Benefit Rider
An accelerated death benefit rider, also known as a living needs or living death benefit, allows you to collect a portion or all of the policy’s death benefit if you become terminally ill and only have a short life expectancy (usually one year or less). The proceeds that you receive may be used for living expenses, treatment costs, medical bills, nursing or long-term care, etc.
The living benefit acts as a type of “lien” against the life insurance policy, thereby reducing the overall death benefit that is eventually paid out to your beneficiaries upon death.
You can receive the accelerated death benefit as one lump sum amount or in a series of regular installments. In most cases, 50 to 80 percent of the death benefit can be accessed; however, some insurance companies will pay out as much as 100 percent. Your policy will detail the percentage available to you.
The income that you receive will not be subject to federal income tax, provided that it meets certain criteria. For example, in order to qualify for a tax free exemption, you will need to be classified as being terminally ill when you file your income taxes. In most states, living benefits are not subject to state income tax.
There are typically several ways that a policyholder can trigger their living death benefit, such as the following:
- The diagnosis of a terminal illness, with death likely to occur within a certain period of time.
- Permanent confinement to a nursing home facility.
- The inability to perform daily activities.
- A specific type of catastrophic illness or need for medical care such as life support, organ transplant, etc.
While this rider may be either included on the policy for free or at a nominal cost, some life insurance companies charge a small fee for actually exercising your accelerated death benefits.
Life Insurance Policy Riders
There are numerous options available when buying life insurance policy riders. Some may need to be purchased at the same time as the policy, while others may be added in the future.
As always, smart consumers will compare life insurance quotes, including the cost of riders, before making a decision. Enter your zip code now to begin a free quote and find the best company, policy, and rate.