3.6 - Life Insurance Policy Riders

Question 1

Life Insurance Policy Riders

Answer 1

An amendment or rider modifies conditions of the policy by expanding or decreasing its benefits, or excluding certain conditions from coverage, and are at the option of the insured. Policy riders are available for an additional premium in most cases. Riders are provided for a specified period of time that is stated in the policy. It is typical for a rider to end at a specified age (such as the insured’s age 65). Once a rider drops from the policy, the additional premium will also drop. Most riders are added at the time of policy issue. Any riders added after the policy has been issued usually require evidence of insurability.

Question 2

Disability Riders

Answer 2

A. Waiver of Premium

B. Payor Benefit (Waiver of Payor’s Premium)

C. Disability Income Benefit

D. Waiver of Cost of Insurance

Question 3

Waiver of Premium - (Disability Riders)

Answer 3

If the insured becomes totally disabled, the company waives premiums for the duration of the disability, therefore the policy remains in-force. There is usually a maximum 6-month elimination period before premiums are waived. The Waiver of Premium rider drops at an age stipulated in the contract, such as age 65. This means that the disability must have occurred prior to this age in order for premiums to be waived. Once on claim the waiver continues either until the disability ends or the policy ends. Cash value and dividends continue as under normal premium payments.

Question 4

Payor Benefit (Waiver of Payor’s Premium) - (Disability Riders)

Answer 4

If the payor (policyowner) dies or becomes disabled and is unable to make the premium payments, the insurer will waive the premiums payments for a specified period of time. Because this rider is commonly added to a juvenile policy, the payor (usually a parent) typically must show evidence of insurability before the rider can be added to the policy.

Question 5

Disability Income Benefit - (Disability Riders)

Answer 5

In the event of total disability, and after an initial waiting period (such as 6 months), premiums are waived and the insured is paid a monthly income. The monthly disability income benefit is typically limited to a percentage, usually 1% of the face value. The benefit paid from the rider does not reduce the death benefits paid out upon death.

A disability income rider pays monthly income to a totally disabled insured. The income is a specified number of dollars per $1,000 of death benefit, which may be expressed as a percentage of the death benefit. Waiver of premium allows the insured to avoid paying premiums when totally disabled. Money paid as income under a disability income rider does not affect the death benefit in any way.

Question 6

Waiver of Cost of Insurance - (Disability Riders)

Answer 6

A rider that waives the deduction of the monthly cost of insurance and expense charges associated with a Universal Life type policy while the insured is totally disabled, usually after 6 months of continuous disability. Typically, the disability must occur prior to a stipulated age.

Question 7

Term Riders

Answer 7

Term (insurance) riders may be attached to any permanent , interest sensitive, or term policy to provide additional insurance protection for a fixed period of time. If the need for additional coverage is temporary, a term insurance rider is more cost effective than buying another policy.

For example: An individual takes out a loan/mortgage and wants additional coverage to pay the debt if death occurs before the loan is repaid. A decreasing term rider could be added to an existing policy to meet this need.

Question 8

Riders Covering Additional Insureds

Answer 8

A. Spouse (Other Insured) Rider

B. Child Rider

C. Family Rider

D. Nonfamily Rider

Question 9

Spouse (Other Insured) Rider - (Riders Covering Additional Insureds)

Answer 9

This type of rider provides level term coverage on the life of the insured’s spouse. Under the basic policy, this rider also provides a conversion provision that permits the spouse to convert to permanent coverage without evidence of insurability prior to the termination of the rider or upon the death of the insured.

Question 10

Child Rider - (Riders Covering Additional Insureds)

Answer 10

Provides level term coverage on the life of all of the insured’s children. This rider is usually offered at one premium rate and may cover newborns after 14 days of life. Adopted children can be added to the coverage without increasing the premium. The children have coverage to a specified age (21 to 25) and are usually given the option to convert to a permanent policy without evidence of insurability.

Question 11

Family Rider - (Riders Covering Additional Insureds)

Answer 11

This is a combination of writing both the Spouse and Child Rider on one policy. This may be written as a policy or a rider; in the market today, it is normally written in the form of a rider. Usually family riders are sold in units (packages) of protection, such as $5,000 on the main wage earner, $1,500 on the spouse, and $1,000 on each child.

Question 12

Nonfamily Rider - (Riders Covering Additional Insureds)

Answer 12

Covers an additional insured with an insurable interest, such as a business partner.

Question 13

Riders Affecting the Death Benefit Amount

Answer 13

A. Accidental Death Benefit (Double or Triple Indemnity)

B. Accidental Death and Dismemberment

C. Guaranteed Insurability

D. Return of Premium

E. Return of Cash Value

F. Cost of Living (COL)

Question 14

Accidental Death Benefit (Double or Triple Indemnity) -

Riders Affecting the Death Benefit Amount

Answer 14

In the event of a claim, the policy normally pays double or triple the face amount if death was a result of an accident. This rider may be called a multiple indemnity rider and pay multiple times the face amount. The benefit is payable only if death occurs before a specific age and within 90 days of the accident. It does not add any additional values to the base policy, but may be added to any type of individual life policy. Among other exclusions, death due to sickness is excluded. This rider typically expires at age 65.

Question 15

Accidental Death and Dismemberment - (Riders Affecting the Death Benefit Amount)

Answer 15

This rider provides a benefit in addition to the base of the policy. The rider pays 100% of the amount of the rider, known as the principal sum, upon accidental death. If the insured suffers an accidental dismemberment loss, such as loss of a limb or eyesight, the rider pays 50% of the rider amount, known as the capital sum. Double dismemberment benefits (loss of 2 limbs or total eyesight) are provided at 100% of the rider. Benefits of the rider are only payable if the loss is accidental and occurs within 90 days of the accident. This rider typically expires at age 65.

Question 16

Guaranteed Insurability - (Riders Affecting the Death Benefit Amount)

Answer 16

Allows the insured to purchase stated amounts of additional insurance every 3 years based on certain ages (specifically 25, 28, 31, 34, 37, and 40), events, or specified dates without evidence of insurability, up to a maximum age, usually 40. The premiums are based on attained age. The events which will allow for the insured to obtain additional insurance in between the specified ages, including marriage and the birth or adoption of a child, are times when the need for insurance coverage may increase. This rider normally limits the insured to acquire additional amounts of the same type of coverage already in force and the insurer often limits the amount of coverage that may be added. This rider drops at age 40.

Question 17

Return of Premium - (Riders Affecting the Death Benefit Amount)

Answer 17

This rider uses Increasing Term insurance to provide coverage equal to the amount of premiums paid. If the insured dies within the term, the beneficiary would receive the face amount of the policy plus the benefit of the rider, equaling the total amount of premiums paid.

Question 18

Return of Cash Value - (Riders Affecting the Death Benefit Amount)

Answer 18

Increasing Term insurance equal to the cash value. This rider provides the payment of term insurance equal to the cash value amount at time of death. However, this does not relieve the obligation to pay loans from the claim proceeds at time of death.

Question 19

Cost of Living (COL) - (Riders Affecting the Death Benefit Amount)

Answer 19

The cost of living rider enables the insured to purchase more insurance each year to help offset increasing insurance needs due to inflation. The amount that can be purchased is based on increases in the cost of living index. This additional coverage is usually available at low rates, and evidence of insurability does not need to be provided for such increases.

Question 20

Accelerated Death Benefits Riders

Answer 20

Accelerated Death Benefits provide for an early payment of a portion of the face amount prior to death. This rider provides tax-free access to policy benefits based on an insured qualifying as terminally ill (death is expected within 12-24 months), or chronically ill, such as permanent confinement in a nursing home, long-term care if they are unable to perform activities of daily living or another other acute illness that requires long-term care, such as AIDS or the need for an organ transplant. These benefits do not include disability income. Accelerated death benefits do not have to be repaid if the insured’s health improves.

Question 21

There are two riders that provide Accelerated Death Benefits:

Answer 21

1. Living Needs Rider

2. Long-Term Care Rider

Question 22

Living Needs Rider - (Accelerated Death Benefits)

Answer 22

Allows the early payment of a portion of the face amount before death if the insured become terminally ill, usually with 12-24 months life expectancy. Typically, it is an amount equal to 50 - 90% of the policy’s face amount. Upon death, the early payment will be deducted from the benefit paid to the beneficiary. The rider is normally provided without a premium charge because it is an advance of the death benefit.

Question 23

Long-Term Care Rider - (Accelerated Death Benefits)

Answer 23

Provides up to 100% of the policy benefits if the insured qualifies for long-term care benefits as defined in the rider, such as the inability to perform 2 out of 6 activities of daily living. Any payout is an acceleration of the life insurance death benefit, meaning it will reduce the ultimate death benefit payable to the beneficiary. The amount of protection is determined at the time of policy purchase. Long-term care benefits are paid income tax free after the insured meets the qualifying requirements.

A long-term care rider provides an advance payment of the death benefit for the covered expenses of long-term care a chronically ill person may incur.

Question 24

Effect on the Death Benefit

Answer 24

After the accelerated benefits are paid and any lost interest to the insurer is deducted, the insurer must pay the balance of the face amount to the beneficiary.

Question 25

Exclusions and Restrictions

Answer 25

The accelerated death benefit cannot contain exclusions or restrictions that are not also exclusions or restrictions in the policy. Typical exclusions apply to suicide, intentional self-inflicted injury, war, or engaging in illegal occupations or activities.