Customize Your Life Insurance With Riders

A rider is basically a provision that you can add to a life insurance policy that helps you customize it to make it best fit your needs. The rider provides additional benefits that the basic policy does not. Some you need to pay for, some are included at no cost.

Let’s cover the riders that are typically included with term life insurance policies without additional costs:

Accelerated death benefit rider: Life insurance is meant to provide a sum of money to your loved ones in the event of your death. But what happens if you become terminally ill, and it’s you who needs money for medical bills, or other expenses, especially if you can’t work? This rider, which is typically included in term life policies, allows you to access a portion of your death benefit if you become terminally ill. For example, if a physician determines you have less than 12 months to live, you may be able to access up to 75% of the death benefit, up to a certain maximum. But keep in mind that every company’s guidelines are a bit different.

Term conversion option: With this rider, you have the right to convert your term policy to a permanent life insurance policy within a specific time period. Each life insurance company has different rules regarding when you are eligible to convert, but having a term conversion option is advantageous because you can convert the term policy without a new medical exam and your rate is determined based on the health rating you got when you purchased the term life policy. That means that if you have a term policy and your health deteriorates, you may want to convert the policy so that it doesn’t expire and leave you with limited options for getting new coverage.

There are other riders that you can add to customize your policy, but that come at an addition cost. These include:

Child insurance benefit rider: This allows you to add life insurance for your child. Typically children between 15 days and 18 years old are eligible to be added to your policy, and coverage on your child expires between ages 21-25, depending on the life insurance company you choose. This rider typically allows anywhere between $1,000 to around $25,000 of coverage per child. Although no parent wants to go through losing and burying a child, coverage is inexpensive. So if you have young children and not much in savings to cover those costs, this rider can help with final expenses, should the unexpected happen.

Accidental death benefit rider: When you purchase a traditional life insurance policy, the death benefit covers you for “any cause.” This means that whether you die from natural causes, disease, accident or injury, you’re covered, and your beneficiaries are eligible to receive a death benefit. An accidental death benefit rider allows you to increase the death benefit on your policy in case you die as a result of an accident or injury (typically you must die within 90 days of the accident or injury to qualify). You can generally double your coverage in case of accident with this rider, up to an additional $250,000-$500,000 depending on the life insurance company.

Waiver of premium rider: This would protect you in case you got disabled. If you have this rider, the life insurance company would continue to pay your policy premiums for you as long as you are disabled. This is a rider that you need to qualify for, which would depend on your health and occupation. My recommendation is that if you buy a policy that is inexpensive and you know you will be able to afford the premium under any circumstance, you don’t need to pay an additional fee for this rider. However if you are buying a more substantial policy that has a premium that you will only be able to afford if you are earning the income you are used to, you may want to consider this option.

Return of premium rider: The most “expensive” term life insurance rider is the return of premium rider. With this rider, if you outlive the term of your policy, you get back all the premiums you paid. For example, if you buy a 20-year term life policy and you live past the 20 years, you will get back all premiums paid. While this sounds great, having this rider will significantly increase the cost of your term policy, and if you are a savvy investor, you may be able to get a better return on your investment doing it yourself.

Let’s take a look at an example. If a 40-year-old buys a $250,000 20-year term policy with return of premium, the policy would cost $884 per year. At the end of 20 years you would get back $17,680. Without the return of premium rider, the same policy would cost $300 per year, which means you are paying an additional $584 per year for this rider. If you invested the $584 each year, at a rate of 4% per year over 20 years, you would net $17,390—about the same as the return of premium on the life insurance policy. Any return over 4% and you would end up getting a better return investing the money on your own, as opposed to buying the rider. The bottom line is that if you find that you aren’t disciplined enough or knowledgeable enough to invest the money on your own, this rider could be beneficial, otherwise I’d recommend saving the money on your own as you could probably get a better return on your own.

Now let’s discuss what these riders cost. We’ll use our 40-year-old male applying for a 20-year $250,000 term life insurance policy (at preferred plus non-tobacco rates). Keep in mind, these numbers are a guide. The annual cost of the main term policy would be about $200 per year. A $10,000 child rider would cost an additional $50 a year. A waiver of premium rider would cost less than $30 a year. An accidental death benefit rider would cost between about $150-$250 a year, depending on the life insurance company you choose.