3.6 Life Insurance Policy Riders
An amendment or rider alters the provisions of a life insurance policy by expanding or restricting coverage, or by excluding specific conditions. Riders are optional and are generally selected at the discretion of the insured. In most cases, riders require an additional premium and remain in force for a defined period as stated in the policy. Many riders terminate at a specified age, such as age 65. When a rider expires, the associated additional premium is discontinued. Riders are most commonly added at the time the policy is issued. If a rider is requested after the policy has been issued, evidence of insurability is typically required.
Disability Riders
Waiver of Premium: If the insured becomes totally disabled, the insurer will waive required premium payments for the duration of the disability or until the policy terminates, whichever occurs first. To qualify, the insured must satisfy an elimination (waiting) period, typically 3 to 6 months (90 days to 6 months). Premiums must continue to be paid during this waiting period. Once the waiver is approved, it is applied retroactively to the date the disability began. While the insured remains disabled, the insurer credits the waived premiums to the policy as if they had been paid. Policy benefits—including cash value growth and dividends, if applicable—continue uninterrupted. Unless the insured remains disabled, the rider generally terminates at age 65.
Payor Benefit (Waiver of Payor's Premium): If the payor (policyowner) dies or becomes totally disabled and is unable to continue making premium payments, the insurer will waive the required premiums for a specified period as outlined in the policy. This rider is most commonly attached to juvenile policies. Because the payor—typically a parent—represents the financial risk to the insurer, evidence of insurability is generally required before the rider can be added.
Disability Income Benefit: If the insured becomes totally disabled and satisfies the elimination period (commonly six months), the insurer will waive required premiums and pay a monthly income benefit. The disability income payment is typically calculated as a percentage of the policy's face amount, often 1% per month. Benefits paid under this rider do not reduce the policy's death benefit payable to the beneficiary.
Waiver of Cost of Insurance: A rider designed for Universal Life policies that waives the monthly deductions for mortality (cost of insurance) and administrative expenses if the insured becomes totally disabled. Benefits typically begin after a continuous disability period of approximately six months. Coverage under the rider generally applies only if the disability occurs before a specified age stated in the policy.
Term Riders
Term Rider is a term insurance rider that may be added to a permanent policy, an interest-sensitive policy, or even another term policy to provide additional coverage for a specified period. When the need for increased protection is temporary, attaching a term rider is generally more cost-effective than purchasing a separate policy.
For example, if an individual incurs a loan obligation and wants additional coverage to ensure the debt is paid in the event of premature death, a decreasing term rider can be added to the existing policy. This rider would provide coverage that declines in alignment with the outstanding loan balance.
Riders Covering Additional Insureds
Spouse (Other Insured) Rider: This rider provides level term insurance coverage on the life of the insured's spouse under the primary policy. It typically includes a conversion privilege that allows the spouse to convert the term coverage to a permanent policy without providing evidence of insurability. Conversion may be exercised prior to the rider's expiration or upon the death of the insured under the base policy, subject to the terms of the contract.
Child Rider: This rider provides level term life insurance coverage on the lives of the insured's eligible children under a single premium charge. Coverage typically applies to all current and future children, including newborns after a specified period (commonly 14 days) and legally adopted children, without requiring an additional premium increase. Coverage generally remains in force until the child reaches a specified age, such as 21 or 25. At that time, the child is usually granted the option to convert the term coverage to a permanent policy without providing evidence of insurability, subject to policy terms.
Family Rider: A Family Rider combines both the Spouse Rider and the Child Rider under a single policy. While it may be structured as a separate policy, it is most commonly issued as a rider attached to the primary insured's coverage. Family riders are typically offered in preset units or packages of coverage. For example, one unit may provide $5,000 of coverage on the primary wage earner, $1,500 on the spouse, and $1,000 on each child.
Nonfamily Rider: This rider provides life insurance coverage on an additional insured who is not a spouse or child, such as a business partner or key individual. An insurable interest must exist at the time the rider is added to the policy.
Riders Affecting the Death Benefit Amount
Accidental Death Benefit (Double or Triple Indemnity): This rider provides an additional death benefit if the insured's death results from a qualifying accident. In such cases, the policy may pay two or three times the face amount, depending on the rider's terms (often referred to as a multiple indemnity rider). The benefit is typically payable only if death occurs within a specified time period—commonly within 90 days of the accident—and before a stated age. Death resulting from illness is excluded, along with other specified exclusions. This rider does not build cash value or add any additional accumulation to the base policy. It may be attached to most types of individual life insurance policies and generally expires at age 65.
Accidental Death and Dismemberment (AD&D): This rider provides benefits in addition to the base policy when losses result from a qualifying accident. If the insured dies as a result of an accident, the rider pays the full rider amount, referred to as the principal sum. In the event of accidental dismemberment—such as the loss of a limb or eyesight—the rider generally pays 50% of the rider amount, known as the capital sum. If the insured suffers double dismemberment (for example, the loss of two limbs or total loss of sight), the rider pays 100% of the rider amount. Benefits are payable only if the loss results from an accident and occurs within a specified time frame, typically within 90 days of the accident. This rider usually terminates at age 65.
Guaranteed Insurability Rider: This rider grants the insured the right to purchase additional amounts of life insurance at specified intervals—commonly every three years at designated ages such as 25, 28, 31, 34, 37, and 40—without providing evidence of insurability. The option is typically available up to a maximum age, often age 40. Premiums for the additional coverage are based on the insured's attained age at the time each option is exercised. The rider may also allow additional coverage upon certain qualifying life events, such as marriage or the birth or adoption of a child, when insurance needs increase. Generally, the additional coverage must be of the same type as the base policy, and insurers typically impose limits on the total amount of coverage that may be added. The rider usually terminates at age 40.
Return of Premium Rider: This rider typically utilizes increasing term insurance to provide additional coverage equal to the cumulative premiums paid into the policy. If the insured dies during the specified term, the beneficiary receives the base policy's face amount plus an additional benefit equal to the total premiums paid to date.
Return of Cash Value Rider: This rider generally uses increasing term insurance to provide additional coverage equal to the policy's cash value at the time of death. Upon the insured's death, the beneficiary receives the base policy's face amount plus an additional benefit equal to the accumulated cash value. Any outstanding policy loans, however, must still be repaid from the death proceeds and are not eliminated by this rider.
Cost of Living (COL) Rider: This rider allows the insured to increase coverage periodically to help address the effects of inflation. The amount of additional insurance available is typically tied to changes in a recognized cost-of-living index. The added coverage is generally offered at favorable rates, and increases may be exercised without providing evidence of insurability, subject to policy terms.
Accelerated Death Benefits Riders
Accelerated Death Benefit (ADB) – This rider permits the insured to receive an advance payment of a portion of the policy's face amount while still living, provided certain qualifying conditions are met. Eligibility typically requires that the insured be certified as terminally ill (with a life expectancy of approximately 12–24 months) or chronically ill, such as being permanently confined to a nursing facility, unable to perform activities of daily living, or suffering from a severe condition requiring long-term care (e.g., advanced illness or organ transplant need). Accelerated death benefits are generally received income tax–free when qualification requirements are met. These benefits are not disability income payments and do not need to be repaid if the insured's health later improves. Any amounts paid reduce the policy's death benefit payable to beneficiaries.
There are two riders that provide Accelerated Death Benefits:
Living Needs Rider: This rider permits the insured to receive an advance of a portion of the policy's face amount if diagnosed as terminally ill, typically with a life expectancy of 12 to 24 months. The accelerated benefit generally ranges from 50% to 90% of the policy's face amount, subject to policy limits. Any amount paid under this rider is deducted from the death benefit ultimately payable to the beneficiary. Because it represents an advance of the policy proceeds rather than additional coverage, the rider is often included without an additional premium charge.
Long-Term Care (LTC) Rider: This rider allows the insured to access up to 100% of the policy's death benefit if qualifying for long-term care benefits under the terms of the contract. Qualification typically requires the inability to perform at least two of the six activities of daily living (ADLs) or meeting other criteria specified in the rider. Benefits paid under this rider represent an acceleration of the life insurance death benefit and will reduce the amount ultimately payable to the beneficiary. The maximum benefit amount is established at the time the policy is issued. When eligibility requirements are satisfied, long-term care benefits are generally paid income tax–free, subject to applicable tax rules.
Effect on the Death Benefit: Once accelerated benefits have been paid and any applicable charges or lost interest have been deducted, the insurer will pay the remaining portion of the face amount to the beneficiary.
Quiz
1. Which statement best describes a Waiver of Premium rider?
A. It permanently reduces the policy's face amount during disability
B. It pays a lump sum to the beneficiary upon disability
C. It waives premium payments after an elimination period and applies retroactively to the date of disability
D. It cancels the policy if the insured becomes disabled
Correct Answer: C
Rationale: Waiver of Premium rider suspends premium payments if the insured becomes totally disabled after satisfying a waiting period (typically 3–6 months). Once approved, the waiver is retroactive to the onset of disability, and policy benefits (including cash value growth) continue as though premiums were paid.
2. What is the primary difference between a policy loan and a Return of Cash Value Rider?
A. A loan increases the face amount, while the rider reduces it
B. The rider eliminates outstanding loans
C. The Return of Cash Value Rider pays an additional amount equal to cash value at death, but loans must still be repaid from proceeds
D. Both function identically
Correct Answer: C
Rationale: The Return of Cash Value Rider provides additional coverage equal to the accumulated cash value at death. However, outstanding policy loans must still be repaid from the death benefit. A loan itself is simply borrowed against the cash value and does not eliminate repayment obligations.
3. Under a Guaranteed Insurability Rider, which of the following is true?
A. The insured may increase coverage at any time without limits
B. Additional coverage requires proof of insurability
C. Additional coverage is available at specified ages without evidence of insurability
D. Premiums for additional coverage are based on original issue age
Correct Answer: C
Rationale: The Guaranteed Insurability Rider allows the insured to purchase additional coverage at designated intervals (e.g., ages 25, 28, 31, etc.) without evidence of insurability. Premiums for the additional coverage are based on the insured's attained age at the time the option is exercised.
4. Which rider would most appropriately address inflation concerns by increasing coverage based on an economic index?
A. Return of Premium Rider
B. Cost of Living (COL) Rider
C. Accidental Death Benefit Rider
D. Payor Benefit Rider
Correct Answer: B
Rationale: The Cost of Living (COL) Rider increases the policy's coverage in relation to changes in a recognized cost-of-living index. These increases typically do not require evidence of insurability and help offset inflation's impact on purchasing power.
5. Which statement correctly describes Accelerated Death Benefit (ADB) riders, such as Living Needs or Long-Term Care riders?
A. Benefits are paid only after death
B. Benefits must be repaid if the insured recovers
C. Benefits are an advance of the death benefit and reduce the amount payable at death
D. Benefits increase the policy's face amount
Correct Answer: C
Rationale: Accelerated Death Benefit riders allow the insured to receive a portion of the death benefit early due to terminal or chronic illness. These payments are advances of the death benefit and reduce the amount ultimately payable to beneficiaries. They do not need to be repaid if the insured's health improves.