A living benefits rider helps life insurance policyholders access a set amount of money while they are still alive. This can help pay for otherwise costly medical expenses and care. There are several kinds of living benefits riders that allow policyholders to access funds if they meet certain criteria, such as accelerated death, long-term care, and accidental death and dismemberment riders. Read on to learn about living benefit riders and how they can help you enhance your life insurance coverage.
Table of Contents
How Living Benefit Riders Work
The main feature of a life insurance policy is its death benefit: the lump sum paid to the policyholder’s chosen beneficiaries upon their passing. However, policyholders may want to tap into their policy’s death benefit for many reasons. For instance, about 5% of U.S. workers experience a short-term disability each year and may need to replace lost income. A living benefit rider can make that possible.
Various living benefit riders are available for life insurance policies, allowing the policyholder to access some or all of their death benefit early in certain circumstances, such as being diagnosed with a chronic, critical, or terminal illness or experiencing a life-altering injury. If the rider’s criteria is met, policyholders can withdraw a set amount of money either in one lump sum or over time, depending on the rider’s specifications.
Types of Life Insurance Living Benefit Riders
Living benefit riders fall into three broad categories:
- Injury and Illness: These riders apply if policyholders experience life-changing injuries, suffer from chronic diseases, or are diagnosed with a terminal illness.
- Premium-Based Riders: These may eliminate premium payments if consumers become disabled or return premiums paid if policyholders outlive policy terms.
- Long-term Care Rider: Typically associated with permanent life insurance policies, this type of rider lets policyholders use some of their death benefits to pay for long-term care.
Riders For Injury and Illness
Injury and illness riders include accelerated death benefit riders, as well as accidental death, critical illness, and disability income benefits. These types of riders are designed to reduce the financial burden on policyholders if they are unexpectedly injured or disabled or if they are diagnosed with critical or terminal illnesses.
Accelerated Death Benefit
An accelerated death benefit rider makes it possible for policyholders to access a portion of their death benefit early if they’re diagnosed with a terminal illness. The benefit typically ranges from 25% to 95% of the policy’s face value.
Taking an advanced death benefit helps people with terminal illnesses afford everyday expenses or pay for medical bills that are not covered by health insurance or Medicare. However, receiving an advance of the death benefit reduces the amount available for beneficiaries once the policyholder passes.
Accidental Death Rider
An Accidental Death and Dismemberment (AD&D) rider typically provides additional coverage in the event of the policyholder’s accidental death or dismemberment. The definitions for what constitutes an “accidental death” or “dismemberment” can vary by policy, but generally include:
- Accidental Death: A death that occurs as a direct result of an accident and not from natural causes or illness. The death usually must occur within a certain time frame from the accident, often 90 days, to be covered.
- Dismemberment: The loss or loss of use of body parts or functions (e.g., limbs, eyesight, hearing) as a result of an accident. Specific coverages can include loss of one limb, loss of two limbs, loss of sight in one or both eyes, loss of hearing, and loss of speech.
The AD&D rider typically specifies the amount paid for different types of losses, with the full benefit amount usually payable for accidental death and a portion of the benefit payable for dismemberment, depending on the severity of the injury.
Critical and Chronic Illness Benefit
A critical illness or chronic illness rider gives policyholders diagnosed with certain serious illnesses the option to receive a portion of their death benefit early. For example, critical illnesses cover specific medical events or conditions, such as cancer, heart attacks, and strokes. Chronic illness riders, on the other hand, focus on ongoing conditions that make performing activities like eating and personal hygiene difficult or impossible without assistance.
Accessing a portion of the death benefit early helps people with critical or chronic illnesses cover everyday expenses if they cannot work. This benefit also helps pay for medical services and supports that health insurance does not. However, like the accelerated death benefit rider described above, it reduces the death benefit amount available to beneficiaries once the policyholder passes.
Disability Income Benefit
A disability income rider is an optional policy add-on that provides a supplemental monthly income to policyholders who become totally disabled. The monthly payment is generally equal to a percentage of the death benefit or a percentage of the policyholder’s pre-disability income.
Receiving a portion of their regular income helps policyholders pay bills and cover household expenses while they’re unable to work. There’s a waiting period before the rider kicks in, and the benefits are payable for a set number of months or years, depending on the policy terms.
Riders For Premiums
Living benefits riders for premiums help mitigate the cost of insurance over time. Waiver benefits keep policies active but remove the need for premium payments if policyholders become disabled. Return of premium riders, meanwhile, allows consumers to recoup some of their insurance costs if they outlive their life insurance term.
Waiver of Premium Benefit
A waiver of premium rider allows a policyholder to stop paying their life insurance premiums if they become totally disabled, making them unable to continue working. With this rider, the policy remains active and may continue accumulating cash value and dividends if it is a permanent life insurance policy.
The definition of total disability varies from insurer to insurer, and the rider may terminate when the policyholder reaches a certain age, such as 60 or 65.
Return of Premium Benefit Rider
This benefit is only available for term life insurance policies. Term life insurance offers coverage for a set number of years, such as 5, 10, or 20. If the policyholder dies when the coverage is active, the insurer pays out the death benefit, per the policy terms. But if the policyholder outlives the term, there is no payout and the coverage expires.
A return of premium rider is a living benefits rider that reimburses some or all of the policyholder’s premiums paid if they outlive their life insurance term. For example, if a consumer has a 20-year term policy with this rider and a $30 monthly premium, they might receive as much as $7,200 if they’re still alive when the coverage expires 20 years later.
This rider has the potential to reduce or eliminate the cost of carrying life insurance. However, policies with this rider tend to cost significantly more than standard policies.
Riders For Permanent Life Insurance
Permanent life insurance riders leverage the persistent nature of these policies to assist with long-term care costs. Many permanent policies also offer a non-rider benefit in the form of cash value that accrues investment value over time.
Long-term Care Benefit
A long-term care rider allows eligible policyholders to access some of their death benefit early to help pay for the costs of long-term care, such as home care, assisted living, or nursing home care. This is significant as health insurance and Medicare generally do not cover long-term care expenses.
Life insurance policies with long-term care riders are sometimes marketed as hybrid life insurance. Benefits eligibility is based on medical or functional criteria, which can vary between insurers. The qualification for a long-term care (LTC) benefit rider typically hinges on the policyholder’s inability to perform a certain number of the Activities of Daily Living (ADLs) or being diagnosed with a severe cognitive impairment. The criteria often include:
- Activities of Daily Living (ADLs): Most policies use the inability to perform a specific number of ADLs as a trigger for benefits. The six standard ADLs are bathing, dressing, eating, transferring (moving to or from a bed or chair), toileting, and continence. Typically, the inability to perform two or three out of these six activities can qualify a policyholder for long-term care benefits.
- Cognitive Impairment: Severe cognitive impairments, such as Alzheimer’s disease or other forms of dementia, that pose a safety risk to the individual can also qualify for LTC benefits, even if the individual can still perform ADLs.
Cash Value
Cash value is not actually a rider, but a living benefit included in nearly all permanent life insurance policies. It is not available with term life policies. It is a savings or investment feature, and cash value accounts grow based on premium contributions and may earn interest or other investment gains. However, some insurers offer riders that modify the cash value. For example, a paid-up additions rider can provide increased cash value growth.
But whether modified with a rider or not, cash value gives policyholders the option to withdraw or borrow against the policy, which provides a source of funds for both unforeseen and day-to-day expenses. However, tapping into the cash value can reduce the death benefit available to beneficiaries and may have tax implications.
How Much Do Living Benefit Riders Cost?
Costs vary significantly based on the type of rider and policy details. The lower the chance you’ll actually use a given rider, the lower the cost. Consider an injury rider for a client with a stable, low-risk job. In this case, the cost of the injury rider might be $5 or $10 per month. Riders such as the return of premiums, meanwhile, could pay out a significant amount to policyholders if they outlive their policy term. As a result, these riders may increase clients’ monthly policy costs by 20% to 30%
The cost of living benefit riders depends on multiple factors, including:
- Insurer pricing: Each insurance company has its own rider pricing guidelines and underwriting approaches, resulting in variable rider costs.
- Policyholder personal data: Personal factors such as age, occupation, life expectancy, and any currently existing health conditions may affect the cost and availability of riders.
- Policy details: Policies with longer terms or higher coverage amounts can increase the cost of a rider.
- Rider types: The type of rider also impacts the price. For example, long-term care riders on permanent policies could pay for years’ worth of in-home or nursing home care. As a result, they may come with higher costs than riders such as accidental or accelerated death.
Should You Consider Adding Living Benefits Riders To Your Life Insurance?
Living benefit riders offer advantages and drawbacks. While these riders can help policyholders access death benefits early, apply benefits to long-term care, or stop paying premiums entirely, they also come with added costs.
As a result, decisions about living benefits should take into account both the cost of life insurance over time and the potential advantages of a rider. For example, a policyholder with a permanent life insurance policy who works in a dangerous or high-risk industry may want to consider a waiver of premium benefit. Someone with a five-year term life insurance policy, meanwhile, may find that the cost of a return of premium rider exceeds the potential benefit.
All in All
Living benefit riders offer a way for policyholders to mitigate the financial impact of unexpected illness or injury, reduce premium costs, or access death benefits early to offset the costs of long-term care.
In much the same way that consumers need to find the life insurance policy that fits their lifestyle and current finances, it’s worth considering the overall impact of riders. If potential advantages outweigh increased premiums, it may make sense to spend on a rider. If riders are unlikely to apply, it may be more cost-effective to purchase standard insurance policies.