Life Insurance 101: Riders
[This is part 7 of a 9-part series. For a full overview of topics, see the Life Insurance Basics page.]
Life insurance companies offer a variety of options that can be added to a policy. Many of these come in the form of a rider and may or may not require an additional premium. Below are some of the more common riders. It is important to understand these options to ensure they are right for you. Be sure to ask questions especially if the agent strongly recommends that you buy them.
- Family Benefit Rider (FBR). This rider provides a small amount of term coverage on the lives of your immediate family (spouse and children). The coverage is usually very nominal - for example, $100,000 for spouse and $10,000 for children. Spouse FBR coverage is often decreasing term which expires at a specific age such as age 60. Child FBR coverage typically expires at about age 22. The premium is usually a few extra dollars per month and some underwriting will be required, especially for your spouse. The FBR is designed to provide funds to take care of those necessary expenses associated with the premature death of a family member.
- Accidental Death and Dismemberment. This is often referred to as "Double Indemnity." It provides an additional death benefit, and typically doubles the original coverage if death is accidental. It may also provide a payment if the insured suffers a traumatic injury such as loss of a limb, blindness, etc. It is important to realize that accidental deaths are rare and homicide or acts of war are not normally covered. So, it may not be worth the additional cost. Read the provision carefully as it will often define "accident."
- Guaranteed Insurability Option (GIO). As a feature of permanent life insurance, a GIO allows the owner of the policy to purchase additional coverage for standard premiums at specified times without proof of insurability, or no physical examination. GIO opportunities are usually provided on specific birthdates such as 25, 30, 35, etc. and upon marriage or the birth of a child. Usually, age 45 is the last opportunity. The amount of additional coverage is nominal - $10,000 -$20,000 - and there is a limit to the number of GIOs that can be exercised. Most companies charge an additional premium for this feature. Many agents promote this option as attractive feature. However, many if not most people never exercise the option. If you have a family history of serious illness or disease, it might be worth considering.
- Waiver of Premium. This is another popular option recommended by agents. If the insured were to become disabled and unable to work, this option would waive the premiums during the period of disability. There is an extra premium charged for this option and it typically expires at age 60 to 65. Read the provision carefully as it will specify the requirements for the disability.
- Conversion Option. This allows the owner of a term policy to convert the coverage to permanent life insurance without proof of insurability. There may or may not be an additional charge for this option. The conversion option must normally be executed before a specific date. Two years before the expiration of the term coverage is typical. For example, if you had term coverage to age 65, you would need to convert your policy prior to your 63rd birthday. This is a very useful feature for those who want permanent coverage but cannot afford it right away.
- Long Term Care Option (LTCO). A relatively new option offered with some permanent life insurance, the LTCO is an attractive added policy provision. It provides an early payout of the death benefit if the insured meets the criteria for long term care. The standard criteria that trigger this option are the inability to perform two of the five Activities of Daily Living (ADL) or severe cognitive impairment (Dementia or Alzheimers). ADLs include eating, dressing, bathing, toileting, and transferring from bed to chair. The condition must be certified by a physician. The LTCO typically pays out the death benefit in monthly installments which can then be used to pay for long term care. Once the LTCO is exercised, you also stop paying any premiums if required.
The options described above are the more common riders offered by insurers. As
stated, most of them require additional monthly premiums which can add significantly to the overall cost of a policy. It is therefore important to carefully evaluate these features to determine if they are really of value to the insured. Read the provisions of the options to see what exclusions and limitations are included and ask yourself: "Why do I need this feature?" In many cases they are unnecessary or there may be better alternatives. In the next chapter, we will discuss the various Settlement Options that survivors have for receiving policy death benefits.
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