Riders, Riders and More Riders

Transcript of Podcast Episode 106

Hello, this is Bill Rainaldi with another edition of Security Mutual’s “SML Planning Minute.” In today’s episode, “Riders, Riders and More Riders.”

When considering the purchase of life insurance, there are many carriers and types of products that may fit your needs. As discussed in previous episodes, there are term, whole life, universal life, and many hybrid policies that may be suitable depending on your circumstances. In some cases, a combination of one or more policies may work in tandem to help meet your needs.

Many life insurance carriers offer optional riders that can be added to a policy to provide supplemental benefits. In this episode we’ll cover some of the most popular and useful riders to tailor life insurance protection to specific situations. Some of these riders are available at no additional premium, while others do require a premium. Please be aware that this is merely an overview. Each company has its own versions of riders, and specific terms will vary from one carrier to another. Most important, you should review the terms and conditions of each of these riders to see how they may suit your specific needs.

Waiver of Premium Rider

In this author’s opinion, one must-have is a so-called “waiver of premium” rider. This rider provides the policy’s premiums will be paid if the insured becomes totally disabled as defined in the rider. A premium will be charged for this rider on whole life and term policies. The numbers are staggering—higher than most people realize. You can ignore the problem, but it’s hard to ignore the facts: just over one in four of today’s 20-year-olds will become disabled before they retire. Accidents are not usually the culprit. Back injuries, cancer, heart disease and other illnesses cause the majority of long-term absences.¹

We’ll cover disability income in more detail in another episode, but waiver of premium is a form of disability protection.

Why is this rider important? What happens if you become disabled? Your earned income ceases, but your bills continue. One might argue this is a scenario worse than death in that with death you are no longer a consumer; with disability you continue to be a consumer. What if you had to make a choice between paying either your electric bill or the premium on your life insurance policy? Not an easy choice, as both are important to have, but I imagine you’d pay the electric bill first. The waiver of premium rider ensures your life insurance premiums will be paid should you become disabled, as defined in the policy.

Level Term Rider

What if you have permanent life insurance needs but also have a short-term need for additional life insurance protection? In that case, a level term rider may be helpful. A level term rider adds life insurance protection for a limited period of years, like 10, 15, 20 or 30 years, for an additional premium. Typically, the level term rider premium is far lower than the premium required for the permanent life insurance. The term life coverage expires at the end of that stated period. Some carriers’ term riders afford policyowners the option to convert the term coverage to permanent coverage—a helpful option should the temporary need for coverage be extended. If you need a large amount of life insurance but have a limited budget, you can purchase some amount of the permanent coverage and add the term insurance to the same policy. This may be a more cost-efficient and easier way to obtain coverage than having two policies.

Paid-Up Additions Rider

At the other end of the spectrum is a paid-up additions rider (PUAR), which may be added to a whole life policy to add fully paid-up life insurance. This rider not only adds death benefit, but also builds the policy’s cash value. This may be important to those seeking increasing survivor benefits and to those focusing on building the policy’s savings element. Each PUAR premium payment increases both the policy’s death benefit and the cash value. Premiums may be fixed or flexible depending on the specific terms of the rider.

Chronic Illness Accelerated Death Benefit Rider

Another rider gaining popularity in recent years is the chronic illness accelerated death benefit rider, a so called “living benefits” rider. It provides benefits in the event the insured becomes chronically ill as defined in the rider. The insured must be diagnosed as chronically ill and certified as such by a qualified healthcare professional. The terms of these riders typically require the chronic illness to last for the remainder of the insured’s lifetime. The rider permits the policyowner to accelerate a portion of the death benefit to be paid to the policyowner. The benefit amount usually is based on a percentage of the policy’s face amount and subject to certain limitations. Often the amount of the accelerated benefit can be up to 25 percent of the policy’s face amount for a calendar year. Again, limitations apply. Some riders allow benefits to be paid in subsequent calendar years too. Keep in mind that benefits can vary depending on the state where the policy is issued.

Some chronic illness accelerated benefit riders require an additional premium, and others apply rider charges only at the time of the chronic illness claim and deduct them from the benefit payments. The policy remains in force with a reduced death benefit after the benefit is paid. Likewise, premiums and cash values of the policy are adjusted proportionately. Benefits received under this rider may be taxable and may affect eligibility for public assistance programs. It’s important to emphasize a chronic illness benefit rider is not long-term care insurance. It does not qualify got the New York State Long-Term Care Partnership program or similar programs in other jurisdictions and it is not a Medicare supplement policy or rider. Talk to your life insurance professional for more details about this rider.

Terminal Illness Accelerated Benefit Rider

Another “living benefits” rider is the terminal illness accelerated benefit rider, which accelerates a portion of the policy’s death benefit should the insured be diagnosed as terminally ill. The insured must be diagnosed with terminal illness and have a life expectancy of twelve months or less. While this rider may be helpful with paying additional expenses incurred to care for the terminally ill person, benefit payments can be used for whatever purpose deemed appropriate by the policyowner. Typically, the maximum rider benefit may be as much as 75 percent of the face amount, generally up to some stated maximum like $250,000 or $500,000 per insured. Limitations apply. There is usually no premium for this rider. However, an administrative charge may be applied at the time of claim.

Accidental Death Benefit (ADB) Rider

Another rider, the Accidental Death Benefit (ADB) rider, may be especially valuable to those who travel frequently or have jobs that may be more dangerous than others. This optional rider will pay the beneficiaries an additional amount should the insured die by accidental means as defined in the rider. There is an additional premium for this rider.

Guaranteed Insurability Option Rider

Younger people starting out with a first permanent life insurance program would be well advised to consider a guaranteed insurability option rider. This rider gives the policyowner options to purchase specific additional amounts of life insurance protection at predetermined future dates, without providing further evidence of insurability. The additional coverage will be issued with the same premium classification—for example, standard or preferred—as the original policy. The additional policies may be purchased even if the insured’s health has materially changed. Since the insured will be older when the subsequent purchases are made, the new policies will likely require higher premium payments per dollar benefit.

Today’s brief overview gives a high-level introduction to the more commonly used riders in life insurance planning today. Myriad other riders may be beneficial too. Discuss your situation and any concerns with a life insurance professional who can help you develop a permanent life insurance protection strategy using policies and riders to meet your needs.

Contact your local Security Mutual Insurance Advisor today to coordinate your financial plans and help you achieve your goals and objectives.  

¹Council for Disability Awareness. “Chances of Disability. Me, Disabled?” disabilitycanhappen.org. Accessed 9/28/2020. https://disabilitycanhappen.org/overview

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