Life Insurance Policy Riders: What They Are and How They Work

Life insurance policies can often be customized with additional provisions known as policy riders. Depending on the rider, these provisions may provide benefits while the insured is living, help protect coverage if certain events occur, or add flexibility to how the policy operates. Some riders are available with term life insurance, while others are designed specifically for permanent policies such as whole life or universal life insurance. Availability varies by insurance company, product, state, age, health and other underwriting considerations. The important point is that two riders with similar names may not provide exactly the same benefits. Before adding a rider—or relying on one already included in an existing policy—it is important to understand the actual contract provisions, benefit triggers, limitations and costs.

What Is a Life Insurance Policy Rider?

A life insurance policy rider is a provision that modifies or adds benefits to the base life insurance contract. For example, the primary purpose of a life insurance policy may be to provide a death benefit to beneficiaries. An accelerated death benefit rider may allow the insured to access a portion of that death benefit while living if certain conditions are met. Other riders may waive premiums following a qualifying disability, provide benefits for chronic illness or long-term care needs, allow additional insurance to be purchased in the future, or help protect a permanent policy from lapsing under specified circumstances. Some riders are automatically included with a policy, while others must be elected and may involve an additional premium or policy charge. The riders available will depend on the insurance carrier and specific product.

How Much Do Life Insurance Riders Cost?

There is no single way life insurance riders are priced. Some riders may be included with the base policy without a separate premium. Others increase the premium when the policy is issued. Certain riders may instead impose a charge if or when the benefit is exercised. The cost can also depend on factors such as:

• The insured's age and health
• The amount of coverage
• The type of life insurance policy
• The amount of the rider benefit
• The rider's benefit period or duration
• The insurance carrier's pricing and underwriting

Rather than evaluating a rider simply by whether it is “free” or has an additional cost, consider what benefit it provides and under what circumstances you could actually use it.

Common Life Insurance Policy Riders

There are many different riders available in the life insurance marketplace. The following are some of the riders you may encounter when evaluating term or permanent life insurance.

Waiver of Premium Rider

A waiver of premium rider is designed to waive certain required life insurance premiums if the insured experiences a qualifying disability. Exactly what constitutes a qualifying disability is determined by the rider. Depending on the contract, the rider may include an elimination or waiting period before benefits begin. There may also be age limits, maximum benefits, exclusions and specific requirements for demonstrating that the insured meets the rider's definition of disability. The rider may terminate at a specified age even though the underlying life insurance policy remains in force. A waiver of premium rider can be particularly relevant when the insured's ability to earn income is important to maintaining the coverage. However, it should not automatically be viewed as a substitute for disability income insurance. The two forms of coverage address different risks.

Accelerated Death Benefit Rider

An accelerated death benefit rider allows an eligible policyowner or insured to access a portion of the life insurance death benefit before the insured dies when specified conditions are satisfied. A common trigger is terminal illness, although the precise definition and benefit provisions vary by contract. For federal income-tax purposes, certain accelerated death benefits may be excluded from income when statutory requirements are satisfied. For example, current federal rules generally provide favorable treatment for qualifying accelerated death benefits involving a terminally ill insured. Different rules and limitations can apply to benefits involving chronic illness. The amount accelerated generally reduces the death benefit ultimately available to beneficiaries. The policy or rider may also specify maximum benefits, administrative charges or other adjustments. Because these provisions vary, the actual rider—not merely the phrase “accelerated death benefit”—should be reviewed when comparing policies.

Chronic Illness Rider

A chronic illness rider may allow the insured to accelerate a portion of the policy's death benefit following a qualifying chronic illness. These riders commonly use functional or cognitive impairment standards when determining eligibility. Federal tax rules, for example, define a chronically ill individual in part by an inability to perform at least two activities of daily living for the required period or by a need for substantial supervision because of severe cognitive impairment. However, the contractual requirements, benefit structure and tax treatment of a particular rider should be reviewed individually. A chronic illness rider should also not automatically be treated as equivalent to a traditional long-term care insurance policy or a qualified long-term care rider.

Long-Term Care Rider

A long-term care rider can provide access to benefits when the insured meets the rider's requirements for qualified long-term care needs. Depending on the policy, benefits may be structured on a reimbursement or indemnity basis and may be subject to monthly limits, elimination periods and an overall maximum benefit. Qualified long-term care arrangements have specific federal tax requirements. Current federal rules generally use standards involving an inability to perform at least two activities of daily living for a specified period or severe cognitive impairment when determining whether an individual is chronically ill. Long-term care riders can differ significantly from chronic illness riders in their contractual provisions, regulation, benefits and tax treatment. For a deeper discussion, see our article on life insurance with long-term care benefits.

Guaranteed Insurability Rider

A guaranteed insurability rider generally gives the insured the ability to purchase additional life insurance at specified times or following certain qualifying events without providing new evidence of insurability. This can be valuable when future insurance needs are expected to increase but there is concern that changes in health could make additional coverage more difficult or costly to obtain later. The rider typically establishes limits on when the option can be exercised and how much additional coverage can be purchased. Guaranteed insurability provisions are particularly important to understand because the ability to purchase additional coverage does not necessarily continue indefinitely. The option may expire at a specified age or after certain exercise dates have passed.

Term Insurance Rider

A term insurance rider adds temporary life insurance coverage to another life insurance policy. For example, a permanent life insurance policy may provide the base coverage while a term rider provides additional death benefit for a specified period. This can sometimes be used when the policyowner has a permanent insurance need but also has a larger temporary need. Term riders can also be used in business or family planning situations where the amount of coverage required is expected to change over time. The cost, duration, renewal provisions and conversion rights of the term rider should be reviewed just as they would be with a standalone term life insurance policy.

Child Rider

A child rider generally provides a limited amount of term life insurance coverage on eligible children of the insured. Rather than purchasing separate policies for each child, one rider may provide coverage subject to the contract's eligibility requirements and limits. Depending on the rider, coverage may terminate when the child reaches a specified age. Some riders may also provide an opportunity to convert the child's coverage to an individual permanent policy without new medical underwriting. As with other riders, the available coverage amounts, eligibility rules and conversion provisions vary by insurer.

Overloan Protection Rider

An overloan protection rider is primarily associated with certain permanent life insurance policies that permit substantial access to cash value through policy loans. Large outstanding loans can create significant policy-management risks. If a heavily leveraged policy lapses or is surrendered, taxable income may result to the extent the amount treated as received exceeds the policyowner's investment in the contract. An overloan protection rider may help prevent a qualifying policy with significant loans from lapsing by changing how the policy operates after specified conditions have been satisfied. However, these riders typically contain detailed eligibility and activation requirements. Requirements may involve the age of the insured, how long the policy has been in force, the relationship between the loan balance and policy value, and other contractual conditions. An overloan protection rider therefore should not be viewed as permission to borrow without regard to policy performance. If policy values are expected to provide supplemental retirement liquidity, the loan strategy and policy performance should be reviewed periodically. Our article on life insurance retirement plans (LIRPs) discusses these considerations in greater detail.

No-Lapse Guarantee Rider

Certain universal life insurance policies include no-lapse guarantee provisions designed to maintain the death benefit when specified contractual requirements are satisfied, even if policy account values would otherwise be insufficient to support the coverage. These guarantees can be valuable, but they are not simply a promise that a policy can never lapse. The policy may require specified premiums to be paid within prescribed periods, and loans, withdrawals, changes to the death benefit or other transactions may affect the guarantee. The mechanics can also vary considerably among products. For this reason, a policyowner should understand both the policy's account-value performance and any separate guarantee provisions. Our guide to universal life insurance explains the relationship between policy values, premiums and guarantees in greater detail.

Are Life Insurance Policy Riders Worth It?

A rider is useful when it addresses a meaningful planning risk at a reasonable cost and fits the purpose of the underlying life insurance policy. That does not mean every available rider should be added. For example, someone primarily concerned about maintaining coverage during a disability may value a waiver of premium rider. Someone concerned about future care needs may evaluate long-term care or chronic illness benefits. A policyowner planning to use permanent policy values may pay closer attention to provisions affecting loans and lapse protection. The question is not simply whether a rider sounds useful. The better question is whether the rider provides a benefit you need, whether you understand what triggers that benefit, and whether the cost and limitations are reasonable relative to other ways of addressing the same risk.

Four Questions to Ask Before Adding a Life Insurance Rider

Reviewing Riders on an Existing Life Insurance Policy

Riders should not be forgotten once the policy is issued. An existing policy may contain benefits that are no longer needed, guarantees that depend on specific funding requirements, or rider provisions the policyowner has never fully reviewed. It is also possible that the policyowner's planning objectives have changed since the coverage was originally purchased. An independent life insurance policy review can help identify the riders attached to an existing policy, how they work, what they cost and whether they remain consistent with the policyowner's objectives.

The Bottom Line

Life insurance policy riders can make a policy more flexible and provide valuable benefits beyond the basic death benefit. But the usefulness of a rider depends on much more than its name. Definitions, eligibility requirements, costs, benefit limits and expiration provisions can vary by insurance company and product. Before adding a rider—or relying on one already included in a policy—understand what triggers the benefit, what the rider actually provides, how it affects the rest of the policy and what limitations apply.