You’ve figured out how much life insurance you need, how many years you need it, how much you can spend and what type of policy best fits your situation.
But your homework isn’t finished yet. Now an array of life insurance policy add-ons, called riders, must be considered.
“Riders can give policyholders additional benefits and increase peace of mind that if something goes wrong, there’s a Plan B,” says Shelley Fiore, an agent for Detroit Financial Group, a general agency of the Massachusetts Mutual Life Insurance Co.
When you buy life insurance, available riders vary by insurance company and policy, as do the rules for how they work. Costs also vary and depend on many factors, including your age, health and type of policy. We can’t list every option available, but here are some of the most useful riders.
In case you become totally disabled
1. Waiver of premium rider
With this rider, you don’t have to pay the premium if you become totally disabled and can’t work.
Fiore says she always suggests that clients consider it so “they don’t have to choose whether to put food on the table or pay the insurance premium.”
Keep in mind the waiver expires, often at age 60 or 65.
2. Disability income rider
You collect a regular income from the insurance company if you become totally disabled and can’t work. The policy specifies the amount of the income and whether it’s paid for a certain amount of time or for the length of the disability.
Some disability income riders pay out only if you became disabled from an accident, while others pay on accident or sickness, says Al Lurty, senior vice president of ING’s U.S. insurance operations.
In case you need more insurance but your health has declined
3. Guaranteed insurability rider
This rider lets you purchase additional life insurance coverage at a later date without undergoing a medical exam or providing any evidence about your insurability.
Because you never know how your health could change, Fiore says it make sense to consider the rider (if you’re eligible) and think you might want to buy more life insurance later. The option allows you to buy additional insurance at certain intervals, such as every three years, or at certain ages, Fiore says. When the option comes up to buy more coverage, the insurance company considers your age for setting the premium, but not your health.
“I’ve seen people with severe heart conditions or cancer get additional coverage who otherwise would have been declined,” Fiore says.
In case you want to convert term life to permanent insurance
4. Term conversion rider
Term life provides coverage for a certain period of time, such as 10, 15, or 20 years. Permanent life insurance, such as whole life or universal life, provides coverage for your entire life, so your beneficiary receives a benefit no matter when you die.
This rider lets you convert term life insurance into permanent life insurance without undergoing a medical exam. Fiore says it’s especially attractive to young people starting careers and families who need life insurance but don’t have enough money yet to secure all the coverage with permanent life insurance, which has higher premiums than term life.
There will be a deadline for when you must convert, if you want to change the term policy to permanent life insurance without providing health information. Understand the convertibility features of term life before you buy.
In case you become seriously ill
5. Accelerated death benefit rider
This has become standard in the insurance industry, Lurty says, and is usually included automatically for free or offered at nominal cost. The rider lets you collect a portion of the policy’s death benefit if you become terminally ill with a short life expectancy, such as one year. The policy spells out how much of the death benefit is available before death. Usually it’s capped at $250,000 to $500,000, Lurty says.
You can use the proceeds for anything, such as paying medical bills or living expenses. Even though the insurer offers the rider free, the company may charge a fee if it is exercised.
6. Critical illness rider
The insurer pays a lump sum if you’re diagnosed with one of the critical illnesses specified in the insurance policy, such as cancer, heart attack, stroke, kidney failure and others. Instead of reimbursing you for medical expenses, the way health insurance does, the rider provides money to use for any purpose during the course of treatment.
In case the unthinkable happens
7. Child protection rider
No one wants to consider the possibility of losing a child, so all emotion must be set aside when considering a child protection rider. Although the death of a child typically would not result in income loss, as would the death of a spouse, the tragedy still would have some financial consequences, which could be an additional hardship for a bereaved family. This term life insurance rider provides coverage for final expenses in case the unthinkable happens. The coverage generally can be purchased in units - for example, $1,000 — Lurty says, at a nominal price. Basic information about the child’s health is required for underwriting.
In case you die from an accident
8. Accidental death benefit rider
If you die from an accident, this rider provides an additional benefit on top of the policy’s regular death benefit. The option is often referred to as double indemnity when the additional payout equals the original death benefit. Sometimes the rider also includes additional payment for dismemberment. You would collect money if you lost a limb or your sight. Life insurers will consider your occupation and hobbies when determining premiums, Lurty says. High-risk activities, like race-car driving, would boost the rates.
In case you outlive your term life policy
9. Return of premium rider
“If you live to the end of the term, in exchange for paying the premium, in most circumstances you get all your money back,” Lurty says. He notes that some companies use a separate rider where others, like ING, write the return of premium benefit into a base policy.
You pay a higher premium for the opportunity to get your money back. The big question to consider: How does paying the extra cost for the return of premium rider compare to investing that money and buying a basic term policy instead?
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, Lurty says.
There is no one-size-fits-all answer to whether any of these riders are right for you. You’ll need to weigh policy options to find the best package for your needs.
“My best advice is to talk to a knowledgeable life insurance agent to help make an informed decision,” Lurty says.
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