Let it Ride – A guide to Life Insurance riders.
Most of us are familiar with some life insurance basics.
What are the main types of Life Insurance?
Life Insurance breaks down into 2 main categories. Term Insurance and Permanent Insurance.
Term Insurance provides insurance protection for a fixed period of time.
Permanent Insurance has an insurance component and an investment component.
Why do I need life insurance?
1. In case of an untimely death, Life Insurance can offer protection for your family. It can provide funds to deal with mortgages, and living expenses perhaps even your children’s education.
2. It can aid with estate planning and wealth preservation.
3. Life insurance can be used as an additional tax deferred growth tool.
4. Life Insurance can be used in business to help protect the business or a partner’s interest in case of untimely death.
These are among the most common reasons for buying Life Insurance. In addition Insurance companies have created features known as riders. These riders can be added to policies to allow additional customization and flexibility for the insured.
Before buying any policy it is important to make sure you understand what you are buying.
Let’s examine some common riders.
1. Accelerated Death Benefit – This life insurance rider allows the insured to receive a portion of their life insurance policy proceeds while they are alive. The clause is usually triggered by a critical illness diagnosis or a situation where the insured requires Long Term Care.
2. Family Income Benefit Rider – This life insurance rider can assure your family receives a monthly income for a fixed period of time instead of a lump sum payment. This rider can be a valuable planning tool under the right circumstances.
3. Return of Premium Rider – This life insurance rider is typically associated with Term Insurance. It provides for a full refund of all premiums paid and the end of a fully paid term policy, assuming the insured is still living. It is sometimes misunderstood as a policy that earns an interest rate return on the premiums paid. It basically charges a higher premium than a regular Term Insurance policy. The insurance company will invest the money and use the earnings to pay the basic premium. This allows them to then return the principal back to the insured.
4. Accidental Death Benefit Rider – This life insurance rider is also known as a double indemnity clause. This rider provides for additional death benefits, usually double in case of Accidental Death. Before buying this rider, it should be well understood what constitutes an Accidental Death as this can vary from policy to policy.
5. Waiver of Premium Rider – This life insurance rider allows for the waiver of premium if and when the policyholder becomes disabled. During the period of disability the rider makes sure that premiums are kept up to date and the policy does not lapse. This rider is often paired with a disability income rider, which provides a monthly income if the insured becomes permanently disabled.
6. Renewal Provision/Guaranteed Insurability Rider – This life insurance rider is associated with Term Life Insurance. It allows for renewal and at times additional coverage without having to provide proof of insurability. If you purchase this rider make sure you understand any age limits or time restrictions on the on the renewal option.
7. Long-term care rider (LTC) – This life insurance rider acts as an Accelerated death benefits rider. If it is determined the insured needs to be admitted to a Long Term Care facility. The LTC rider allows the insured to access a portion of the death benefit to pay for the Long Term Care.
8. Cost of living rider (COL) – The COL rider allows for periodic adjustments in the policy face amount. Typically the policy amount will be adjusted upward to account for the change in the CPI and the premium will also adjust accordingly.
These are among the most popular life insurance riders. The details of riders can vary from policy to policy and carrier to carrier. We strongly suggest that you use an Insurance Agent to help you create a policy that best suits your needs. When used properly Life Insurance Riders can add tremendous flexibility and value to your Life Insurance policy.