Definition

A rider is a legal document that:
- Amends the base insurance policy
- Adds benefits not in the standard policy
- Modifies coverage to meet specific needs
- Becomes part of contract: Attached to and becomes part of the policy

Characteristics

• Optional: Not required, added at policyholder's request
• Additional cost: Most require extra premium (some free)
• Underwriting: Some riders require medical evidence
• Issue timing: Usually added at policy issue, some can be added later
• Termination: Many riders expire at certain age (e.g., age 65)

Purpose

Waives premium payments if insured becomes totally disabled.

Key Features

Definition of Total Disability

Typically requires insured cannot:
- Perform duties: Unable to perform substantial duties of their occupation
- Earn income: Cannot engage in any occupation for compensation
- Any occupation: Some policies use stricter "any occupation" standard

Waiting Period (Elimination Period)

• Standard: 6 months: Disability must last 6 months before waiver begins
• Retroactive: Once qualified, premiums waived back to disability start date
• Refund: Premiums paid during waiting period are refunded

Duration of Benefit

• While disabled: Premiums waived as long as total disability continues
• Maximum age: Typically to age 60 or 65
• Until recovery: Ends when insured no longer totally disabled

Policy Status During Waiver

• Remains in force: Policy continues with full coverage
• Cash value grows: Continues to accumulate (as if premiums paid)
• Dividends paid: Participating policies still receive dividends
• All benefits intact: All policy features remain active

Limitations

• Pre-existing conditions: May exclude disabilities from conditions existing before rider
• Age limits: Rider typically expires at age 60-65
• Waiting period: 6-month wait can be financial burden
• Definition restrictions: "Any occupation" definition harder to meet than "own occupation"

Cost

• Relatively inexpensive: Typically adds 5-10% to base premium
• Age-dependent: Cost increases with age at issue
• Worth the cost: Very valuable protection for younger insureds with families

Example:

Policy: $250,000 whole life
Annual premium: $2,400
Waiver of premium rider: +$200/year

Insured becomes totally disabled: March 2024
Waiting period: 6 months (through August 2024)
Qualifies for waiver: September 2024

Result:
- No more premium payments required while disabled
- Premiums paid March-August 2024 refunded
- Policy remains in force
- Cash value continues to grow
- Coverage maintained until recovery or age 65

Also called: Living Benefits or Terminal Illness Rider

Purpose

Allows insured to receive portion of death benefit while still living if diagnosed with terminal illness.

Qualification Requirements

Terminal Illness Definition

• Life expectancy: Typically 12 months or less to live
• Physician certification: Requires doctor's certification of terminal diagnosis
• Examples: Terminal cancer, end-stage organ failure, advanced AIDS

Other Qualifying Conditions (Some Policies)

• Long-term care needs: Requiring nursing home or home care
• Catastrophic illness: Heart attack, stroke, organ transplant
• Cognitive impairment: Alzheimer's, dementia

Benefit Amount

Percentage Available

• Typical: 25-75% of death benefit
• Maximum: $250,000-500,000 (many policies cap amount)
• Minimum available: Must leave minimum death benefit (e.g., $10,000)

Payment Options

• Lump sum: Single payment
• Monthly payments: Structured payments over time
• Combination: Lump sum plus monthly

Impact on Policy

Death Benefit Reduction

• Permanently reduced: Death benefit reduced by amount accelerated
• Plus interest: Often reduced by amount plus interest charge
• Remaining benefit: Remaining death benefit still paid at death

Example Calculation

Original death benefit: $200,000
Accelerated benefit: $150,000 (75%)
Interest charge: $10,000

Total reduction: $160,000
Remaining death benefit: $40,000

If insured dies:
Beneficiary receives: $40,000 (not $50,000)

Uses of Accelerated Benefits

• Medical expenses: Pay for treatments, experimental therapies
• End-of-life care: Hospice care, palliative care
• Daily living expenses: Bills, mortgage, living costs
• Travel/experiences: Final trips, family time
• Debt payment: Pay off debts to ease burden on family

Cost

• Often free: Many insurers include at no additional cost
• Small fee if charged: Typically $25-50/year if not included
• Discount at use: Reduction for present value (money paid early)

Tax Treatment

• Generally tax-free: Accelerated benefits for terminal illness usually not taxable
• HIPAA qualified: Must meet Health Insurance Portability and Accountability Act requirements
• Exceptions: May be taxable if used for non-medical purposes

Example:

Insured diagnosed: Terminal cancer, 6 months to live
Policy death benefit: $300,000
Maximum acceleration: 75% ($225,000)
Elects to accelerate: $200,000

Benefit received: $200,000 (used for care, bills, family)
Interest/discount: $15,000
Remaining death benefit: $85,000

At death:
Beneficiary receives: $85,000
Total paid by policy: $285,000 ($200,000 + $85,000)

Also called: Guaranteed Purchase Option

Purpose

Allows insured to purchase additional insurance at specified future dates without evidence of insurability (no medical exam).

Key Features

Option Dates

Typical schedules:
- Age-based: Every 3 years starting at age 25 (ages 25, 28, 31, 34, 37, 40)
- Event-based: Marriage, birth/adoption of child
- Both: Combination of age and life events
- Last option: Usually age 40 or 45

Amount of Additional Insurance

• Fixed amount: Typically equal to original face amount
• Maximum: Often capped at original amount or specific dollar limit (e.g., $50,000)
• Cumulative: Can exercise multiple times up to maximum

No Medical Underwriting

• Guaranteed issue: No medical exam required
• No health questions: Regardless of health changes
• Major benefit: Can buy even if health seriously declined

Premium Based on Attained Age

• Current age pricing: Premium based on age when option exercised
• Not original age: Don't get original age pricing
• Current rates: Based on current rate schedule

Limitations

Must Exercise Within Time Limit

• Typically 90 days: From option date or qualifying event
• Expires if not used: Lose that specific option (but future options remain)
• Cannot carry forward: Unused options don't accumulate

Rider Expires

• Age limit: Usually age 40-45
• No more options: After expiration age

Policy Must Be In Force

• Current on premiums: Base policy must be active
• Not in lapse: Cannot exercise if policy lapsed

Cost

• Moderate: Adds to premium cost
• Younger insureds: More valuable for younger buyers
• Worth it if: Anticipate need for more coverage, concerned about health changes

When Most Valuable

Family Planning

• Before children: Plan to have children
• Growing family: Each child adds coverage need

Career Growth

• Increasing income: Need will grow with earnings
• Business ownership: May need more coverage for business purposes

Health Concerns

• Family history: Genetic conditions may develop
• Risky occupation: Job-related health risks

Example:

Policy purchased: Age 25, $100,000 face amount
GIR rider: Options every 3 years to age 40

Age 28 option:
- Buys $100,000 additional (total: $200,000)
- No medical exam
- Premium based on age 28 rates

Age 31 option:
- Skips (doesn't need more coverage)
- Option lost for this date

Age 34 option:
- Married and expecting child
- Buys $100,000 additional (total: $300,000)
- No exam despite developing diabetes at age 32
- Premium based on age 34 rates (diabetes doesn't affect insurability)

Age 37-40 options: Still available

Also called: Double Indemnity

Purpose

Pays additional death benefit if insured dies from accident rather than natural causes.

Benefit Amount

• Typically doubles death benefit: Hence "double indemnity"
• Can be triple: Some policies offer triple indemnity
• Separate amount: Or specified amount (e.g., $100,000 additional)

Qualification Requirements

Must Be Accidental Death

• Accidental means: Death due to unexpected external event
• Not natural causes: Heart attack, cancer, disease don't qualify
• Examples: Car accident, drowning, falls, accidental poisoning

Time Limit

• Typically 90-180 days: Death must occur within this period from accident
• Direct result: Accident must be direct cause of death

Exclusions

Typical exclusions (no additional benefit paid):
- Suicide: Even if accidental-looking
- War/military service: Death during war or military duty
- Aviation: Private pilot, crew member (commercial passenger usually covered)
- Hazardous activities: Skydiving, racing, mountaineering
- Illegal activities: Committing crime, DUI
- Drug/alcohol: Death while intoxicated
- Self-inflicted: Intentionally self-inflicted injuries
- Disease: Illness, infection, disease (even if contracted accidentally)

Cost

• Inexpensive: Very low cost (accidents rare cause of death)
• Age limits: Often expires at age 65 or 70

Controversy/Criticism

• Limited value: Only ~5% of deaths are accidental
• "Life is not worth more if die in accident": Beneficiary needs are same regardless
• Better alternatives: Better to buy more base coverage
• Marketing tool: Often used to make policy seem more valuable

Example:

Base policy: $250,000
ADB rider: Double indemnity

Death from heart attack:
Beneficiary receives: $250,000 (base only)

Death in car accident:
Beneficiary receives: $500,000 ($250,000 base + $250,000 ADB)

Death while skydiving:
Beneficiary receives: $250,000 (base only - hazardous activity excluded)

Purpose

Returns all premiums paid if insured survives to end of specified term.

How It Works

• Term insurance base: Added to term life policy
• If insured survives term: All premiums refunded
• If insured dies during term: Regular death benefit paid (no premium return)
• End of term: Lump sum equal to all premiums paid

Cost

• Expensive: Can double or triple the premium
• Much higher than regular term: Significantly increases cost

Advantages

• "Free insurance": If survive, get money back
• Forced savings: Disciplined way to save
• Peace of mind: Feel like didn't "waste" money on insurance

Disadvantages

• Much higher premiums: Opportunity cost of higher payments
• Lost investment opportunity: Could invest difference and earn more
• Surrender penalties: Early cancellation loses benefits
• No return if dies: Beneficiaries only get death benefit, not premiums back
• Inflation impact: Money returned worth less due to inflation

Example:

20-year term: $500,000
Regular term premium: $500/year
With ROP rider: $1,200/year

Scenario 1 - Insured survives 20 years:
Total premiums paid: $24,000 ($1,200 × 20)
Return of premium: $24,000 refunded
Net cost: $0

Scenario 2 - Insured dies year 15:
Beneficiary receives: $500,000 (death benefit only)
No premium return: $18,000 premiums not returned

Scenario 3 - Cancel after 10 years:
Premiums paid: $12,000
Surrender value: $0 (or minimal)
Lost: $12,000 (vs. $5,000 for regular term)

Disability Income Rider

• Monthly income: Pays monthly income (e.g., $10/month per $1,000 coverage)
• If totally disabled: While insured totally disabled
• Waiting period: Usually 6 months
• Different from waiver: Pays income, not just waives premiums

Term Insurance Rider

• Additional term coverage: Add term insurance to permanent policy
• Lower cost: Cheaper way to increase coverage temporarily
• Family riders: Can add coverage for spouse and children

Paid-Up Additions (PUA) Rider

• Buy additional insurance: Use dividends to purchase paid-up insurance
• No underwriting: No medical exam required
• Increases death benefit: And cash value
• Participating policies: Available on dividend-paying policies

Cost of Living Adjustment (COLA) Rider

• Inflation protection: Death benefit increases with inflation
• Automatic increases: Based on CPI or fixed percentage
• No underwriting: Automatic, no medical required
• Premium increases: Premium increases with coverage
• Can decline increases: Option to skip year's increase

Long-Term Care (LTC) Rider

• LTC benefits: Provides long-term care benefits
• Accelerates death benefit: Uses death benefit for LTC expenses
• Combines products: Life insurance + LTC in one policy
• Tax advantages: Can offer tax benefits

Child Term Rider

• Coverage for children: Term insurance on all children
• One rider covers all: All children covered under single rider
• Inexpensive: Very low cost
• Convertible: Children can convert to permanent at age 21/25 without exam
• Typical amount: $10,000-25,000 per child

Factors to Consider

1. Client needs: What specific risks need addressing?
2. Budget: Can client afford additional premium?
3. Age: Some riders more valuable at certain ages
4. Health: Guaranteed insurability valuable if health concerns
5. Family situation: Waiver of premium critical for young families
6. Career stage: Income protection needs

Most Valuable Riders

• Waiver of premium: Essential for most people, especially younger insureds with dependents
• Guaranteed insurability: Very valuable for younger buyers expecting income/family growth
• Accelerated death benefit: Often free, provides important flexibility

Less Recommended

• Accidental death benefit: Limited value, better to increase base coverage
• Return of premium: Expensive, better investment alternatives

• Waiver of premium: Waives premiums if totally disabled; 6-month waiting period; retroactive
• Accelerated death benefit (ADB): Advance death benefit for terminal illness (12 months or less)
• ADB impact: Reduces death benefit by amount accelerated plus interest
• Guaranteed insurability rider (GIR): Buy more insurance without medical exam at specific ages/events
• GIR premium: Based on attained age (current age) not original age
• Accidental death benefit: Doubles death benefit if death from accident; many exclusions
• Return of premium (ROP): Returns premiums if survive term; expensive
• Riders require additional premium: Most riders cost extra (some free like ADB)
• Riders become part of contract: Attached to and part of policy
• Age limits: Many riders expire at age 60-65
• Underwriting: Some riders require medical evidence, others don't
• Cannot add all riders later: Many must be added at policy issue