In addition to the many required legal provisions of a life insurance contract, many life insurance contracts include special provisions, permit special endorsements, and/or allow special riders to be attached to the basic contract. The purpose of these provisions and riders often is to enhance the flexibility and fit of the policy to the policyowner’s needs. However, in some cases, they serve to restrict the policyowner’s options and to limit the insurer’s exposure. Also, some of the standard policy provisions, such as the dividend provision, the nonforfeiture provision, the policy-loan provisions, and the settlement provisions, usually include default options that policyowners may request the insurer
To select the policy or insurance package with the most favorable combination of features one must know not only the options available, but also something about how those options may differ among companies and contracts. As a starting point, here are ten riders you should know about.to replace with other options. However, the options are not uniform among contracts; some companies offer a more restrictive list of choices than others or include other limiting features or provisions.
1. Term rider
The most common and familiar rider is the term insurance rider. When purchasing insurance, buyers may add virtually any form of term insurance — increasing, decreasing, or level — to a base permanent policy. The principal advantage to the insured of using a term rider is that the insurer issues the additional insurance on a net cost basis, without some of the fees typical of new issues. Policyowners frequently use such riders when they have a temporary need above their long-term base need or when the policyowners cannot afford to pay the premiums for a permanent policy for the full amount of insurance they need, but still wish to assure coverage for the full amount of their need.
Two of the critical elements people seeking insurance should investigate are the current term rates charged by the prospective companies as well as these companies’ maximum guaranteed term rates. Some companies guarantee that their current term rates will never increase. However, their current term rates may be higher than those of companies who reserve the right to increase term rates, subject to a maximum, if their experience so dictates. Also, if prospective insureds anticipate that they may wish to convert term riders in the future, they should check the companies’ conversion charges, which may vary widely.Term riders normally provide that the policyowner can change the rider to a separate policy or convert it into a permanent form of coverage within a specified period or before a specified age without evidence of insurability. Companies differ with respect to the length of the period of coverage they will permit under the term rider. For instance, some companies limit both the coverage period and the conversion period to the insured’s age 65 or younger; others will permit coverage and conversion to later ages, such as age 75 or older.
2. Accelerated death benefit (ADB) rider
Accelerated death benefit riders, also called living benefit or advanced death benefit riders, are a relatively recent innovation with many variations. In general – for policies with this rider – insurers will pay part or all of the policy face amount of coverage in advance on the diagnosis of certain dread diseases or in the event of circumstances significantly affecting the insured’s longevity and quality of life, such as a major organ transplant or entering a nursing home.
In most cases, once insureds meet the conditions necessary to trigger accelerated payments, they can elect to receive benefits in a single lump sum or as a series of installment payments. However paid under the option, the amount of money insureds may receive generally is more than they would realize by surrendering the policy for cash or by taking a policy loan. Insureds usually do not have to use amounts they receive under the option to pay medical or nursing home expenses. Rather, they generally may use these amounts in any manner they desire.The amount that companies may pay in advance varies by company and circumstance. The percentage of the face amount of coverage that policies may pay out in advance ranges from 25 percent to 100 percent. In those policies with high percentage-of-face payouts, the limits may depend on the reason for payout. For example, policies may make about 70 percent to 85 percent of the death benefit available under the nursing home option and 90 percent to 98 percent under the terminal illness option. The insurers reduce the advanced death benefit amount by actuarial computation to reflect the earlier and determinable payout. Among the factors that affect the actual amount available are the face amount of death coverage, the insured’s actual future mortality, outstanding policy loans, current interest rates, future scheduled premiums, and administrative charges.
The policyowner may make the ADB election with respect to less than the total available insurance, provided the minimum election is for at least a specified amount, typically $25,000, and at least a specified amount of death benefit, such as $25,000, remains in force. When policyowners elect to receive an advanced payment of only a portion of the total benefit, the insurer reduces the life policy proportionately as to death benefit, premium, and value.
3. Disability waiver of premium rider
The waiver-of-premium rider is a form of disability insurance that provides that the basic policy (and often other riders) will continue in force if the insured becomes disabled and incapable of paying premiums. However, if policyowners have taken loans against their policy cash values, interest is still due on the loans. If interest on the policy loans is drawn from policy cash values (rather than paid in cash by the policyowner) and loan balances and interest charges are large relative to the net cash value, the policy could still lapse if the interest charges deplete the net cash value to close to zero.
Waiver of premium riders differ among companies and polices with respect to the period of coverage, the waiting period needed to qualify, and the definition of total disability.
Period of coverage
If the insured becomes disabled after age 60, about half the companies’ provisions provide no waiver of premium benefit. Of those companies that do provide a waiver of premium benefit for disabilities occurring after age 60, most will waive premiums only to age 65, although some specify a period equal to the longer of a specified minimum number of years or to age 65 or 70. For example, the rider may specify that if disability occurs after age 60, premiums will be waived for two years or until the insured is age 65, whichever is longer.In the event of disability, the insurer essentially pays the premiums for the policyowner/insured for a specified period of time that varies from company to company. If disability occurs before age 60, most companies will waive premiums for as long as the disability continues or until the policy would otherwise terminate or endow. Some policies become paid up at age 65. If the waiver of premium rider is in effect at the time a policy becomes paid up, the insurer would not require the insured to resume premium payments even if he should overcome his disability.
Most companies use a waiting period of six months before insureds qualify for disability waiver of premium benefits. However, some companies use a shorter period of four months or less.
Definition of total disability
The definition of total disability varies widely and may be more or less liberal. It is therefore critical when shopping for a policy to determine which definition insurers are using in the policies one is considering.
A majority of the insurers use what advisers generally consider the most liberal definition:
Inability to perform one’s own job for two years, then any job for which reasonably suited by education, training, and experience.
A sizable minority of insurers use a somewhat less liberal definition:
Inability to perform any job for which reasonably suited by education, training, and experience.
A few insurers use a very limiting definition of total disability:
Inability to perform any job for pay or profit.
Many insurers use a duration-varying definition of disability where, for instance, they will use the most liberal “own job” definition for the first 2 to 5 years of disability and then switch to the somewhat less liberal “job for which reasonably suited” definition. Some insurers may even switch again at a later date to the “inability to perform any job” standard. Given the many possibilities or combinations of disability definitions and time frames when the insurers use the various definitions, persons seeking to buy insurance with a waiver of premium rider should review the specifics of the rider carefully.
Most insurers’ definitions also include conditions that are presumptive of total disability. Typically insurers presume the “loss of use of” or less liberally, the “loss of” two body members such as an arm and a leg, or of sight, to constitute total disability qualifying for waiver of premium. Some companies even include total loss of hearing as a presumptive condition. A minority of insurers include no presumptive conditions in their definition of total disability.
4. Long-term care rider (LTC)
Some life insurance issuers offer life insurance with a long-term care rider available for an additional charge. Essentially, an LTC rider is a variation of the accelerated death benefits rider. Persons who buy a policy with this rider can pay the premium in a single lump sum or by making periodic payments. In any case, the policies with the LTC rider provide policyowners with a death benefit that they can also use to pay for long-term care related expenses, should they incur them.
The insurer bases the amount of death benefit and the long-term care allowance on the insured’s age, gender, and health at the time the policyowner buys the policy. The appeal of this combination policy lies in the fact that either policyowners will use the policy to pay for long-term care expenses or their beneficiaries will receive the insurance proceeds at the insureds’ death. In either case, someone will benefit from the premiums policyowners pay.
Accelerated benefits rider – An accelerated benefits rider makes it possible for policyowners to access the death benefit to pay for expenses related to long-term care. The insurer reduces the death benefit by the amount used for long-term care expenses, plus a service charge. If policyowners need long-term care for a lengthy period of time, they will eventually deplete their death benefit. Policyowners also can use this same rider if they have a terminal illness that may require payment of large medical bills. Because (as described above under the accelerated death benefits rider) accelerating the death benefit can have unfavorable tax consequences, one generally should not exercise this option before consulting a tax professional.Insurers add the long-term care benefit to the life insurance policy by either an accelerated benefits rider or an extension of benefits rider.
Example: Policyowner pays a single premium of $50,000 for a universal life insurance policy with a long-term care accelerated benefits rider. The policy immediately provides approximately $87,000 in long-term care benefits or $87,000 as a death benefit. If the insured incurs long-term care expenses, the accelerated benefits rider allows the insured to access a portion, such as 3 percent ($2,610), of the death benefit amount ($87,000) each month to reimburse some or all of the long-term care expenses. The insurer will continue payments until total payments exhaust the total death benefit amount of $87,000 in about 33.3 months. Whatever the policyowner does not use for long-term care will be left to heirs as a death benefit. (The hypothetical example is for illustration purposes only and does not reflect actual insurance products or performance. Guarantees are subject to the claims-paying ability of the issuer.)
Typically, qualifying for payments under a long-term care rider is similar to the qualifying for payments under most stand-alone long-term care policies. Insureds must be unable to perform usually 2 or 3 of the activities of daily living (bathing, dressing, eating, getting in or out of a bed or chair, toilet use, or maintaining continence) or suffer from a severe cognitive impairment.
An elimination period may also apply: policyowners pay for the initial cost of long-term care out-of-pocket for a specific number of days (usually 30 to 90, but sometimes longer) before they can apply for payments under the policy. As with all life and long-term care insurance, the insurance company will require prospective insureds to answer some health-related questions and to submit to a physical examination before they issue a combination policy.
Deciding whether a combination policy is the right choice depends on a number of factors.