Life insurance riders are add-ons to life insurance policies that allow policyholders to customize their insurance coverage. While they may come with an additional cost, these riders can offer benefits for both you and your family. Depending on your current needs and future plans, different types of riders may be a better fit for your life insurance policy.
How Do Life Insurance Riders Work?
Life insurance riders provide additional coverage on your life insurance plan. In effect, they “ride along” with the plan itself to offer benefits in specific circumstances. Riders don’t operate on their own — instead, they’re tied to a life insurance policy and are only in effect as long as the policy itself is in effect.
Overall life insurance policies provide coverage in the event of death, and common types include whole life insurance and term life insurance. Whole life insurance coverage lasts from the agreed-upon start date until death as long as you’re paying your monthly premiums. Term life insurance coverage is active for a fixed term with fixed premiums and can then be renewed or canceled.
For both types of policies, life insurance riders are optional and last as long as the policy is active, or until they are canceled. Some allow access to funds before death while others provide coverage for additional family members. Costs are based on the type and number of riders attached to your policy, and these costs are then rolled into your monthly premium.
Common Types of Life Insurance Riders
There are 3 common types of life insurance riders: general riders, living benefit riders, and death benefit riders.
General riders are a common type of life insurance rider and are regularly included in life insurance policies. In some cases, options such as term conversion riders may be bundled as part of your original policy at no extra cost or for a small premium increase, while more substantial guaranteed insurability rider options may come with larger premium increases. Let’s look at each general rider type in more detail.
Guaranteed Insurability Rider
The guaranteed insurability rider makes it possible for policyholders to increase the amount of their death benefit to align with changing life circumstances without having to answer many health questions or undergoing a health exam. Insurability riders from different providers may have different stipulations about how often death benefits can be increased and the total amount of benefit increase allowed each time. It is normally at set ages in an insured person’s life. Along with the fee for the rider itself, increases to your benefit also come with increased monthly premiums.
This rider is a good option if you’re just getting started with life insurance and can only afford a basic policy. As your circumstances change, such as if you get a better-paying job, start a family, or buy a house, you can update your life insurance benefits to match your changing needs.
Term Conversion Rider
A term conversion rider allows you to convert a term life insurance plan into a permanent or whole life insurance plan. This rider is useful as a way to offset the risk of insurability of permanent life insurance as you get older and your health declines. A term rider lets you convert some or all of your existing life insurance into a permanent benefit, usually without a health exam or health questions. This type of rider could ensure that you can obtain whole life insurance later in life.
Depending on your provider, you may be able to convert part of your policy to a permanent plan and keep the remaining portion as a term life insurance benefit, or you may be able to convert the entire policy. A life insurance agent could help you confirm the cost of converting to a whole life plan using your rider.
Living Benefit Riders
Life insurance plans were originally called “annuity contracts” and were designed to help protect policyholders against “superannuation,” which happens when you outlive your income and leave behind potential debts. The first plans were simple: Policyholders paid a guaranteed amount to specified beneficiaries after the death of the policyholder.
As these policies have become more complex, however, new riders have been introduced that offer additional benefits. Living benefit riders provide specific benefits that may be used while the policyholder is still alive.
Return of Premium Rider
A return of premium rider does just that — it returns the premiums paid on your life insurance at the end of the term if you’re still alive. If you die during the term, the death benefit goes to your beneficiary. The advantage of this rider is that it helps you recoup some of the money you’ve spent on term life insurance over 10, 20, or 30 years. The potential downside is that it may come with a significant additional cost to your current premiums, and if you die during the term, these additional payments are lost.
It’s worth doing the math. For example, if your annual premium is $200 and a return of premium rider adds another $300 per year, your total cost has more than doubled. It’s also important to know that premiums paid are not invested and you receive only what you paid in premiums originally.
Waive of Premium Rider
A waive of premium rider allows policyholders to stop paying premiums for their life insurance in the event of disability, such as critical illness, serious injury, or substantial physical impairment. This rider comes with an additional cost based on factors such as your age, current health, and occupation and there’s typically a waiting period before it can be used to reduce insurer risk.
Policyholders may need to provide proof of a substantial life event covered by the rider to waive current premiums. Applicants who have pre-existing health conditions are generally not eligible for this type of rider.
Long-Term Care Rider
A long-term care rider allows you to access a portion of your death benefit to pay for assisted living in a long-term care facility. The cost of this rider varies according to your current age and any current health conditions. If you are older and have underlying health issues that may lead to early-onset care, this rider may be prohibitively costly or unavailable.
Each company may have different parameters that activate this rider. For example, policyholders must demonstrate that they can no longer perform at least 2 activities of daily living (ADLs), such as eating, showering, walking, or dressing without assistance.
Disability Income Rider
A disability income rider provides a monthly source of income if you’re permanently injured or disabled. In some cases, these riders may also cover illness, but consult with the insurer or a licensed agent for specific rider details. The amount paid per month is a percentage of the total life insurance policy amount, and the rider may include a stipulation that non-payment of the premium under disability income won’t cause the policy to lapse.
For example, if your policy has a death benefit of $500,000 and your disability income rider specifies a monthly payment of 1%, you would receive $5,000 per month.
Critical or Chronic Illness Rider
Critical and chronic illness riders provide benefit payouts if you are diagnosed with a critical or chronic illness. The form of the payout varies. In some cases, you receive a single, lump-sum payment from your total benefit, while in others, you receive a percentage of your total benefits paid each month or each year.
The costs of this rider depend on the current length of your term along with your existing health. For example, if you are predisposed to certain critical or chronic illnesses, this rider may be more expensive or unavailable. It’s also worth noting that in the case of critical illness benefits, there may be a survival waiting period where policyholders must be alive at the end of the waiting period to access any rider benefits.
Accelerated Death Rider
An accelerated death rider allows policyholders to take money from their life insurance policy to pay for medical expenses related to a terminal illness. To access this benefit, patients need medical confirmation of a terminal illness that leaves them with less than 1 to 2 years to live.
While the primary use of accelerated death rider funds is to pay for hospice care or a private caregiver, these riders may not specify exact uses for this money, meaning you could possibly use it at your discretion.
Death Benefit Riders
Death benefits riders are designed to protect you against losses in your life insurance benefits in the event of market fluctuations and can also be used to provide additional protection for your family.
Family Income Benefit Rider
The family income benefit rider provides a set monthly payment over a specified period of time for family members in the event that the insured dies. This rider may be used if the policyholder is the primary breadwinner, and it provides a monthly payment similar to the policyholder’s monthly income to help family members manage the difficult time of transition after death, especially if they aren’t currently working.
This benefit is paid out in addition to the lump-sum benefit, although the lump-sum payment may occur after the family income benefit payments are concluded.
Spousal Insurance Rider
A spousal insurance rider allows the policyholder’s spouse to be covered under the same policy, in turn eliminating the need to purchase a second policy. The cost of the rider depends on your spouse’s health and may require a medical exam. However, if the primary policyholder dies, the rider-covered spouse would receive the death benefit but may lose their coverage, unless the insurer allows the surviving spouse to convert their rider into a stand-alone policy.
Accidental Death Rider
An accidental death rider provides coverage if death occurs unexpectedly and not as a result of an illness or other ailment. These riders may also cover dismemberment due to work accidents and payout a lump sum to beneficiaries. This rider may specify a post-accident period — such as 180 days — during which death from the injury must occur for the rider to activate.
Child Term Rider
A child term rider provides coverage for your children under your policy in the event that a child dies before a specific age. If death occurs, a lump-sum payment is made under the rider. Children generally don’t need medical exams to be eligible for a child rider, and it may be possible to convert this coverage into a permanent life insurance plan when the child turns 18.
Cost of Living Rider
A cost of living rider adjusts the annual payments of life insurance plans each year to keep up with inflation and the rising cost of living. This provides more stability for your family in the event of death since the benefits paid are more in line with current costs rather than the cost of living when the policy was originally purchased.
Some policies may allow you to add the cost of living rider at any time during your term, while others must be purchased up-front.
What Riders Should You Get?
The types of riders you should get depend on your current financial, family, and health circumstances. Basic riders such as term conversion are often worth the cost, given the benefit of converting the policy from term to permanent, while others such as critical illness or accidental death riders have more specific use cases.
If you’re unsure which riders make sense for your family, talk to an insurance agent. They can help walk you through how riders work, how much they may cost, and what benefits they can offer.
Life Insurance Riders vs. Multiple Life Insurance Policies
Depending on your circumstances, it may be more cost-effective to purchase multiple insurance policies rather than using riders. This is partly because riders are limited in scope — they’re designed to provide specific benefits at a lower cost rather than purchasing an entirely new policy. For example, the spousal rider provides access to benefits in the event of the primary policyholder’s death, but it then leaves the remaining spouse with no life insurance coverage. As a result, it may make more sense for your spouse to purchase their own policy.
When it comes to child riders, however, the low likelihood of a child dying before the expiry date of the policy coupled with the low cost of adding them to the policy means that it may make more sense to purchase a rider rather than buying a separate plan for your child’s life insurance coverage.