Knowing your riders

By Allen Wastler
Allen Wastler is a former financial journalist with over 30-years of experience, including time at CNBC, CNN, and Knight-Ridder Newspapers.
Posted on Dec 14, 2017

Does “one size fits all” apply to life insurance? Oftentimes, the answer is “no.” That’s where “riders” come in.

Riders are essentially additional benefits added to an insurance policy that often require an additional premium payment. In this way, riders can customize a life insurance policy to address specific needs or concerns.

“Riders can offer great flexibility, but that flexibility comes at a cost,” said John Ocwieja of The Hoopis Financial Group in Chicago.

Typically, the best place to start before even considering riders is the life insurance policy itself. There are different types of life insurance, ranging from bare bones term life insurance, which offers a death benefit for a fixed period of time, to participating whole life insurance, which offers a death benefit for the insured’s lifetime, plus the accumulation of cash value and the opportunity for dividends (which are not guaranteed). (Related: Life insurance overview)

Generally, the kind of riders are available will depend on the kind of insurance policy involved. Also, some insurance companies may offer some types of riders while others do not. Some riders are only available in certain states and have rules about when and under what circumstances they can be added to a policy.

What follows is a general overview of the kinds of riders that are often available.

More insurance coverage

Many riders are aimed at allowing the insured to purchase more insurance or change the conditions of their purchases in the future. This can be advantageous for two reasons.

One, insurance is typically less expensive for the young and healthy. As you become older or if you become sick, life insurance will become more expensive and in some cases difficult to obtain. So having the option to purchase more insurance without going through the typical underwriting process could become valuable, especially if there are changes in your health as you grow older. (Related: Get a life insurance quote)

Two, some insurance policies allow for the accumulation of cash value for the policy on a tax-deferred basis. The opportunity to make fuller use of that accumulation mechanism by adding to their life insurance can be advantageous.

There are a variety of riders that address these two areas in different ways.

  • Guaranteed insurability riders, also called guaranteed purchase riders, give policyowners the option to purchase additional life insurance coverage at certain times in the future. Parents and grandparents buying “starter” policies for their children and grandchildren typically add this rider to give their children the chance to increase their coverage when and if they start families of their own.
  • The renewable term rider can be added when purchasing a whole life insurance policy to provide an additional level of coverage in the form of term insurance. The term insurance is renewable annually. Premiums for this added term insurance increase as the insured ages. But the insured has opportunities to convert this term insurance into permanent insurance for a period of time, like a whole life insurance policy, without a typical underwriting process.
  • A life insurance supplement rider uses a similar mechanism by providing a mix of whole life insurance and term life insurance that is paid for by rider premiums and policy dividends for people with tight budgets. It provides a lower-premium alternative when permanent coverage is desired but the cost of an all-whole-life policy is prohibitive.
  • Some permanent life insurance policies are eligible to receive dividends, which are not guaranteed. A yearly term purchase rider directs such dividend payments toward the purchase of one-year term insurance.
  • An additional life insurance rider allows the policyowner to purchase additional participating paid-up insurance for an additional premium (called paid-up additions) that increases the death benefit and accelerates the cash value growth, of an insurance policy. There are limits and terms for making payments under this kind of rider and many options to consider when making this choice.

Unexpected misfortune

Other riders are aimed at giving policyowners the flexibility to adjust their life insurance policy if they encounter serious problems in the course of their life.

The waiver of premium rider is one of the more common. It allows for the premiums on a life insurance policy (including those associated with certain riders on the policy) to be waived if the insured becomes totally disabled, as described in the rider. Cash value growth and any dividends payable will continue as if the policyowner were still paying.

In a similar vein, some companies offer riders that provide some income in the event of disability. Using such riders could have negative consequences on the death benefit and cash value of a policy, however. Many insurance professionals suggest looking at other options, like disability income insurance, before adding such riders. (Related: Is disability income insurance worth it?)

Riders are also becoming more widely available to help people get through problems in later years, like the need for long-term care or facing a terminal illness. Generally, these riders allow policyowners to accelerate the payment of death benefits to help cover care or end-of-life costs. This option will reduce both the policy and any riders eligible to be accelerated in proportion to the amount of the accelerated death benefit ; and typically, has an additional cost when exercised.

Also important to note, while a life insurance policy that allows death benefits to be accelerated to help pay for long-term care may offer some flexibility, it should not be the primary concern . If the only purpose of buying this type of policy-rider combination is to pay for long-term care, there are other options that should be considered.

Special circumstances

A variety of more specialized riders also exist, again depending on the insurance company, region, and circumstances.

Businesses, for example, often need to insure key personnel where a loss may result in a disruption to operations. But a business likely wouldn’t want to keep that insurance in force if that person left the company. So there is the transfer of insured rider, which allows the policyowner to substitute one insured person for another.

There are also riders that adjust potential death benefit payouts with the Consumer Price Index; or provide a benefit for the death of a child or spouse; or provide for the return of premiums paid should you live to the end of a term life insurance policy.

And, yes, there is also a rider that allows for a larger death benefit payout in case of accident, which was made famous in the Oscar-nominated 1944 movie “Double Indemnity.” While such riders exist, though, they tend not be used as much as you might think. The odds of dying in an accident are, for most people, much lower than dying of old age or illness.

In the end, there are a great many riders available covering a wide extent of possibilities and circumstances. But they come at a cost and, depending on an individual’s situation, some may be worthwhile, some not. So consider your own circumstances carefully and consider consulting a financial professional before adding any to a policy.

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The information provided is not written or intended as specific tax or legal advice. MassMutual, its employees and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel. Opinions expressed by those interviewed are their own, and do not necessarily represent the views of MassMutual.