What you need to know about life insurance riders

Does fine print make your eyes cross? Us too.

And while learning about life insurance riders may never be anyone’s beach read of choice, becoming familiar with all the different riders that may be available, and whether you need them, can save you some money on premiums and also help ensure that your family is protected if anything happens to you.

While finding a life insurance policy that fits your financial life and your family’s needs is easier than ever thanks to modern technology, there are some choices you’ll need to make along the way. These optional add-ons — called riders — may, yes, require you to wade into the fine print.

Riders can give you exactly what you need when it comes to your policy, but they can also introduce a level of complexity and can increase the amount of your premium. It’s important you fully understand your options and choose what’s right for you to get the protection that makes the most sense for you, at the lowest cost.

Definition of a life insurance rider

In short, life insurance riders are extra benefits that allow you to personalize your life insurance policy. Some are built into the policy, and others may involve a fee. By definition, a rider is a legal term, meant to denote an amendment, change or addition to a legal contract. While the term itself sounds complicated, riders are common in the life insurance industry and are often offered in various forms as additions to your policy. The benefits of a rider often provide flexibility for the person insured by the policy.

Some people may not need riders at all. In other cases, life insurance riders can provide you additional protection against some “what ifs” that come up in life. It’s a personal decision.

Six common life insurance riders

While riders can help personalize your life insurance coverage to your individual needs, it often increases your premium amount and can make understanding your life insurance policy benefits a little more complicated. Not everyone needs all the riders available to them, so it’s important to determine if the potential for added costs is worth it for you.

Across permanent and term life insurance policies, there are numerous riders available, and they vary from company to company. To narrow the focus a bit, we’re focusing exclusively on term life insurance policy riders since it’s a popular type of coverage for many people, and it’s what we sell at Haven Life.

1. Accelerated death benefit

An accelerated death benefit provision is a standard life insurance rider and is often included with a basic policy. For example, this rider is an inherent benefit of the Haven Term life insurance policy, so the cost is included directly as part of the premium pricing.

An accelerated death benefit rider creates a provision in a life insurance policy that allows the policyholder to receive a portion of the life insurance death benefit if he or she were to become terminally ill — usually with a life expectancy of two years or less. For example, Haven Term policyholders can access 75% of their benefit, or a maximum of $250,000, whichever comes first.

This rider isn’t necessarily about making the policy a payout to you, rather it allows you to access some of the death benefit proceeds so you can get your affairs in order.

It’s important to know that there are some downsides to this rider — specifically when it comes to exercising the benefit. Most life insurers charge an administrative fee for accessing the proceeds in advance. Also, due to borrowing from the death benefit, the proceeds your beneficiaries receive when you pass away will be reduced to account for the loan.

Additionally, a 1099 LTC would be generated as a result of payment received from the accelerated death benefit. Often, these payments are income tax-free. However, it’s always best to discuss with a tax advisor as there could be tax consequences.

While none of us want to think about dying, if you were to become terminally ill, this rider can be very valuable in enabling you to get your affairs in order before passing. For example, paying toward medical bills or other expenses.

So is the accelerated death benefit rider worth it? Considering that many companies offer this rider as an inherent feature of their policies, it’s good to understand how it works and if this is a benefit you want to ensure you have.

2. Disability waiver of premium

If you were unable to work due to a disability, how would you pay your premium? Purchasing life insurance is all about considering what-ifs, and this question is an important one to ask yourself and your family.

The Social Security Administration found that one in every five Americans lives with a disability, so the possibility of being unable to work at some point due to disability is more common than you might think.

If this circumstance concerns you, then a waiver of premium rider might be worth considering. This rider covers your policy premiums if you become too sick or injured to work. Ultimately, it helps prevent your life insurance policy from lapsing. Depending on the rider, it could cover you for 12 months in which you can’t pay, or up to a certain age. The individual terms of the rider vary from carrier to carrier.

Haven Life also provides this type of life insurance rider, although it does add an additional cost to your life insurance premium, and there are limitations based on which state you live in.

There are no fees associated with utilizing this benefit (that’s what the added premium cost covers.) But, there is a six-month waiting period before you can file a claim to use this rider.

3. Convertibility

Also known as a term conversion, this rider allows you to convert the term insurance policy you buy today into a permanent policy later down the road —  without requiring you to take or retake a medical exam to do so. Keep in mind, your premium amount will increase to account for going from a term policy to a permanent one (with lifelong coverage.)

We at Haven Life do not offer this rider because we have found that most of our customers are seeking term life insurance. However, our parent company MassMutual does offer this rider with some of its policies.

There is usually a deadline on when you can convert either some or all of the term policy. For example, the timeline on a 20-year term limit might be 10 years of ownership to convert the full amount. This deadline varies by insurer and policy, so you’ll want to make sure you understand the fine print.

To determine if this rider is a fit for you, it’s important to consider if you think you’ll want permanent life insurance at some point. Or, if you at least want the flexibility to convert at some point if you change your mind. If so, this is a good deal. You’re potentially able to lock in your insurability while you’re still young and healthy because you’re using the same underwriting results to inform the pricing of the permanent policy. That said, permanent policies aren’t for everyone.

Permanent life insurance might be the right choice if, beyond the primary need for insurance protection, you:

• Seek coverage that lasts a lifetime and won’t expire before you pass away
• Are seeking a product that offers a cash value component
• Can afford the 3-figure premium payments on a monthly basis
• Want life insurance to be part of your long-term financial strategies
• Are interested in the tax advantages that are particular to whole life insurance

4. Return-of-premium

One of the biggest gripes people have about all types of insurance is that you’re paying premiums for a “what if” scenario. And, in almost all cases, you hope the worst case scenario won’t happen. But, where do all those premiums go? The answer is: to the insurance company — unless it’s a return of premium product.

A return of premium rider, also called RoP, offers a refund should you outlive the term of your policy. Generally, if you purchased a 30-year term life insurance policy, for example, and lived beyond the life of the policy, most or all of the premiums you paid get reimbursed to you. Yes, that’s a lot of money coming back your way —  but RoP riders often raise the price of your premiums significantly for this benefit.

Let’s do a cost comparison.

A 20-year, $500,000 Haven Term policy, issued by MassMutual, for a healthy 30-year-old woman, would start at about $18 per month. (That’s a medically underwritten, level-term policy.) A return of premium policy for the same woman at the same about over coverage would start at about $77 per month according to a State Farm tool.

Again, keep in mind, you do get that money back. Some think of it as forced savings, some see it as letting an insurance company earn money on your money instead of you. We do not offer this rider for the Haven Term policy.

5. Disability income

This rider acts like long-term disability insurance, but instead of buying a separate policy, it’s a rider on your life insurance coverage. If you were to become disabled and unable to work, the life insurance company would pay you a monthly stipend to replace a portion of your income.

Most disability income riders can provide a benefit for up to two years if you are unable to work due to an injury or illness. Additionally, premiums for the life insurance coverage are waived while the policyholder is receiving disability benefits.

As we mentioned above, many Americans are disabled at one point in their life, which is why disability insurance is often recommended by financial planners. This rider typically provides limited benefits compared to the typical disability income policy but is worth considering when a disability policy is unavailable or cost prohibitive.

6. Long-term care

A long-term care rider allows you to take money out of your death benefit to pay for… you guessed it, long-term care expenses, such as the cost of a nursing home, assisted living facility or in-home nurse. By 2050, the number of individuals using paid long-term care services will likely double from the 13 million using services in 2000 to 27 million people. Typically, usage of a long-term care rider is triggered by a chronic illness.

CERTIFIED FINANCIAL PLANNER professional Shannah Game of the Your Millennial Money Podcast is an advocate for planning for long-term care needs but normally doesn’t recommend it to clients until they are at least 40 years old and only if they are already on track for other financial goals like retirement.

If you’re concerned about the financial impact of long-term care for yourself, then it might be worth considering this rider.

What riders do most people buy?

Just because all these different riders exist doesn’t mean you need them all. One may pose a more significant benefit to you than the rest. Or, the fine print and potential cost may outweigh the positives. Focus on considering what you want your coverage to provide for you and your family and determine if additional riders may better personalize the coverage to your needs.

And remember, it’s common to decide that you don’t need any life insurance riders. A basic life insurance policy could be a perfectly suitable and affordable option for your peace of mind.

While we hope this information is useful, it’s intended as general education only. Haven Life doesn’t provide tax or legal advice, so we encourage you to seek advice from your own tax or legal professionals.