Important Extra Benefits with Some Life Insurance Policies

This is the third of five columns helping federal employees understand their choices when it comes to purchasing a life insurance policy. This column discusses life insurance riders.

Life insurance riders allow a life insurance applicant to customize a life insurance policy so that the policy works best for the applicant’s needs. Some life insurance riders increase the cost of the life insurance premiums, but some riders are added at no charge. Before purchasing a life insurance policy, an applicant is advised to be aware of the possible rider options and their associated costs.

SEE ALSO:

• Choosing the Best Life Insurance Coverage for Federal Employees
• Important Choices and Considerations for Purchasing an Individual Life Insurance Policy

Common Types of Life Insurance Riders

Life insurance riders are extra benefits to an existing life insurance policy. These extra benefits to the life insurance policy including provide extra insurance coverage, or ways in which the life insurance policy owner can access the money from the death benefit while the policy owner is still alive.

There are many types of life insurance riders, and their availability can vary depending on the life insurance company and the type of life insurance policy. There may be a cost (in the form of a higher premium) associated with some of the following riders:

• Accelerated Death Benefit (ABD) rider. Also called a life benefit rider, this rider is often included in life insurance policies at no extra charge. Federal employees who are enrolled in the Federal Employees Group Life Insurance (FEGLI) program automatically have access to this rider with no extra premium cost. The ADB rider allows the life insurance policy owner to take an advance on the policy death benefit if the policy owner is diagnosed as terminally ill. The insurance policy should be checked for the definition of a terminal illness, which could be defined as an individual having a life expectancy of one year or less. Depending on the company, the policy owner may be able to take all or a portion (such as 80 percent) of the death amount income-tax free.
Some insurance companies have variations on accelerated death benefit riders that lets the policy owner take the money for critical or chronic illness. The rules will be defined in the insurance policy. For example:

1. Critical illness may be defined as a condition that would result in death within six months if not treated.

2. Chronic illness may be defined as a condition that makes it impossible for the policy owner to do two “activities of daily living” (ADL). ADLs are generally defined by insurance companies as eating, bathing, dressing, continence, toileting and transferring (from chair to bed or from bed to chair).

• Waiver of premium. A waiver of premium allows a policy owner to stop paying the life insurance premiums if the policy owner becomes disabled. The waiver applies to both the base insurance policy and any riders. The FEGLI program does offer a waiver of premium rider.

• Long-term care insurance rider. This type of life insurance rider allows the policy owner to take money from the death benefit of the life insurance policy in order to pay for long-term care expenses. It is often much less expensive to purchase this rider than to pay for a stand-alone long-term care insurance policy. This assumes that an individual can qualify for a long-term care insurance policy. The FEGLI program does not offer a long-term care insurance rider. Taking money from the life insurance death benefit to pay for long-term care will take away from the amount that life insurance beneficiaries will receive.

• Term Life Insurance conversion rider. This is a rider that allows a term life insurance policy owner to convert to a permanent life insurance policy. This rider can be useful if the term life insurance policy owner’s health has deteriorated since the policy was purchased and the policy owner wants a permanent life insurance policy. There is no underwriting in this conversion. That is, permanent life insurance coverage is guarantee issue. However, the permanent life insurance premiums could be unaffordable. Each life insurance policy is different. The term life insurance policy owner may be able to convert only a portion of the term life insurance policy to a permanent life insurance policy.

• Child life insurance rider. Some parents get life insurance for their children by adding a rider to the parent’s life insurance policy. This rider will provide a small benefit to cover a child’s burial expenses, such as $10,000. Child life insurance riders are generally inexpensive because the coverage amount is small, and children have a statically low chance of death. Some child life insurance riders allow the parent life insurance policy owner to convert the rider into a permanent life insurance policy for the child when the policy expires.

• Disability rider. If the life insurance policy owner becomes disabled, a disability rider typically offers a monthly payout to the policy owner. The payout is either a percentage of the death benefit, maximum payment per month, or a percentage of monthly gross income.

• Estate protection rider. If the life insurance death benefit is paid to the policy owner’s estate, then this type of life insurance rider can help offset estate taxes, federal and/or state, that may be due.

• Guaranteed insurability rider. This rider is only associated with permanent life insurance policies including whole life insurance, universal life insurance, or indexed universal life insurance. The rider allows the policy owner to increase the death benefit without having to go through a full application process. That is, the policy death benefit amount can be increased without the policy owner having to go through a new medical exam and answering health- and lifestyle-related questions.
Rates for the additional death benefit insurance will be based on the policy owner’s age at the time when the increased benefit is applied.

• Return of premium rider. A return of premium rider in a term life insurance policy allows the policy owner to be refunded all premiums paid in the event the policy owner outlives the term of the life insurance policy. The minimum life insurance term for a return of premium rider is 20 or 25 years.

Cost of An Insurance Rider

The cost of a life insurance rider depends on the specific rider and the life insurance company offering the rider.

Adding a Life Insurance Rider

Applicants for life insurance are advised to make any rider purchases when the applicant purchases the base life insurance policy. This is because adding a life insurance policy rider later will almost always require a policy owner to go through the underwriting process again. And likely require another medical exam.

Dropping a Life Insurance Rider

Most life insurance companies will allow a life insurance policy owner to drop a rider from a policy at any time by simply filling out a form to authorize its removal.

Are Life Insurance Riders Worth the Cost?

There are several life insurance riders that may not be worth the extra cost when added to the existing policy base premium cost. Note that the accelerated death benefits rider is typically automatically included with many life insurance policies (including the FEGLI program) at no extra premium cost.

Those employees who may have unique circumstances for their life insurance needs – either financial or medical – are advised to seek the services of an experienced life insurance agent or broker, or a Chartered Life Underwrite (CLU). A good life insurance agent or broker, or a CLU, should be able to address any concerns individuals may have regarding their eligibility for life insurance and advise on whether any life insurance riders are worthwhile, given an individual’s financial and/or medical situation.