Many riders are now common in the life insurance industry. Others are poised for greater use, depending on market conditions. We’ll review both types here and see how riders that achieve the greatest popularity tend to expand benefits with each iteration.
Some life insurance riders that have become common include: level term riders; accidental death benefit riders; waiver of premium riders; and guaranteed insurability riders. In recent years, the accelerated death benefit rider and the return of premium rider have become very popular, too. The latter two illustrate how riders keep expanding to meet more customer needs.
Accelerated death benefit rider: The accelerated death benefit rider has evolved over the years and is now offered on most life insurance contracts. The rider benefit started as a lien on the death benefit for insureds who were terminally ill. Usually, the insurance company required a physician statement that verified the insured’s life expectancy was less than 12 months.
Later, this rider expanded to include paying benefits when the insured is diagnosed with specific dread diseases, such as cancer or multiple sclerosis. Some developers expanded the rider even further, to include a benefit payment if the insured enters a long term care facility.
This rider’s benefit payment structure expanded, as well. Initially, the benefits only included a portion of the life policy’s death benefit–for example, the original riders commonly paid out 2% of the death benefit per month for a maximum of 36 months. But, over time, carriers started increasing the maximum benefits, so the payout would go up to 100% of the death benefit–and beyond.
Today, some insurers are offering riders in addition to the accelerated death benefit riders that restore the initial death benefit or extend the LTC benefits to twice the original maximum benefit period. A more recent movement has been to include accelerated benefit riders on all types of insurance products. (Initially, most such riders were added to term or universal life policies, but now they also are added to whole life policies.)
Return of premium rider: While this rider has been around a long time on mortgage life insurance products, the return of premium rider recently has hit the mainstream term marketplace where it is very popular. Most carriers find that they are exceeding their sales goals on the rider. In fact, one company sells the return of premium rider on 25% of its term sales.
This popularity comes from the benefit to the insured of receiving the entire premium back at the end of the level term period. Still, insurers do have some uncertainties concerning this rider, because the products have pricing risks that are dramatically different than those for a base term plan. As insurers’ investment earnings on the general account continue to decrease and as a better understanding of the ultimate lapse rate becomes known, carriers are finding it increasingly difficult to maintain competitive pricing on these riders.
What will be the next popular rider? It is difficult to predict because it partly depends on the changing economic environment, shifts in consumer preferences and/or regulatory change. However, a few possibilities include the following:
o An unemployment rider: Similar to the return of premium rider, the unemployment rider has been around a while in the mortgage life insurance market. However, the rider has never hit the mainstream marketplace. The low popularity of the rider is partly due to the difficulty of pricing the product. Considering all of the talk about jobs going overseas and consolidations within industries, the time may be right for the unemployment rider to become as popular as its closely related waiver of premium rider due to disability.
o The family income benefit rider. This, too, has been around for a while but has never really caught on. It guarantees the family will continue receiving a portion of the insured’s monthly income in case of death. The monthly income can be paid for a certain period or until a certain age of the insured. This rider is also difficult to price because, as the mortality rates are increasing, the length of benefit (assuming payment to age 65) will be decreasing. However, it should have appeal to consumers, since the benefit directly matches the financial loss.
o The major surgery rider. This also seems to have added appeal in today’s marketplace, although some regulation may need to change to make it possible. As health costs continue to rise, more consumers are starting to increase their deductibles drastically. This rider would pay a portion of the death benefit at the time of specified surgical procedures. Though currently more popular in countries without an advanced health insurance industry, this type of rider does present advantages in today’s health care environment in the United States.
Keith Dall, FSA, MAAA, CLU, ChFC, is a consulting actuary with Milliman Inc. in the Indianapolis office. His e-mail is firstname.lastname@example.org.
The major surgery rider would pay a portion of the death benefit at the time of specified surgical procedures.