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When you buy life insurance, you’re not necessarily stuck with a one-size-fits-all policy. Riders are add-ons that can change, enhance or supplement your coverage, ensuring your policy meets your specific goals and needs.
Let’s look at life insurance riders in-depth, as well as how they work, types of riders, benefits and when they’re worth it for you.
Understanding life insurance riders
An insurance rider — also known as an endorsement — supplements your existing policy. In other words, it’s additional coverage on top of what you already have. This means you can customize and personalize your policy to increase your coverage or trigger benefits when certain conditions are met.
A life insurance policy — whether it’s term life, universal life or whole life — pays out a death benefit to your beneficiary when you, as the insured policyholder, pass away, as long as the policy is active and in force.
But what happens, for example, if you become disabled, lose your job, and can’t afford your policy premium? Normally, your policy would expire and stop providing coverage. But if your policy includes a waiver of premium rider, you would be reimbursed for any life insurance premiums paid since becoming disabled, and future premium payments would be covered until you recover or meet a certain age.
In other words, riders let you tailor your life insurance to plan for and mitigate your unique concerns or worries.
Common types of life insurance riders
Different types of life insurance riders are available depending on your insurance carrier. Additionally, certain types of riders may or may not be available for your specific type of policy (for example, return of premium riders are only available for term life insurance policies). And each rider works in its own way.
Common life insurance riders include:
Accelerated death benefit rider
An accelerated death benefit (ADB) rider, or terminal illness rider, is supplementary coverage that pays out a portion of your life insurance policy’s death benefit if you develop a covered terminal illness.
This means that if you’re diagnosed with a covered condition, like cancer, you can use a portion of your policy’s death benefits to pay for treatment and other expenses — even groceries, travel or utilities.
Some insurance companies might cap the maximum amount of money you can withdraw to a certain percentage of your death benefit. And, in most cases, withdrawing cash through the accelerated death benefit rider will reduce the total death benefit when you die (which may include interest on the amount withdrawn).
Chronic illness rider
A chronic illness rider, or critical illness rider, is similar to an ADB rider, with one major exception: You don’t need to be diagnosed with a terminal illness. Typically, chronic illness riders begin to pay living benefits when you’re unable to perform at least two out of six basic activities of daily living (ADL).
As with ADB riders, critical illness coverage depends on your insurer, but can include conditions like kidney failure, strokes and dementia.
Waiver of premium rider
A waiver of premium rider is a life insurance rider that waives a policy’s premiums if the policyholder becomes disabled from a covered condition (including both temporary and permanent disabilities), up until they recover or reach a certain age.
In other words, if the rider covers muscular dystrophy and you are diagnosed with that condition, you would not be responsible for paying your premiums.
During the period in which premiums are waived, your policy’s cash value will continue to grow. However, you may be required to provide periodic proof of your disability. Some riders may also include a waiting period before they begin paying out, though premiums paid during this time are reimbursed.
Waiver of premium riders needs to be purchased at the same time you buy your insurance policy and do not cover pre-existing conditions.
Long-term care rider
A long-term care, or LTC, rider helps pay for the cost of long-term health expenses that generally aren’t covered by your health insurance. This means a long-term care rider can help pay for home nursing care or attendance in a nursing home — costly services that could otherwise easily drain your savings.
Long-term care riders pay out in one of two ways:
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Indemnity: You receive a set amount of money every month that you can use however you see fit.
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Reimbursement: You submit receipts documenting your long-term health expenses to your insurer, and they reimburse you up to your policy’s limits.
As with some other types of riders, your insurance company may require you to provide proof of a long-term condition or disability. Your policy may also have a waiting period before benefits kick in.
Though you can purchase a separate long-term care insurance policy, it wouldn’t pay out a death benefit like your life insurance policy would.
Accidental death rider
An accidental death rider, which may also be called an accidental death and dismemberment (AD&D) or double indemnity rider, increases the life insurance payout if you die from a covered accident. Typically, the coverage amount is equal to the face value of your policy’s death benefit, essentially doubling the total payout.
Which accidents this rider covers depends on your insurance company. For example, the rider may cover driving accidents, whereas risky activities (like extreme sports) are considered exclusions. Similarly, your insurer may stipulate that you must die from the accident within a certain amount of days for the rider to pay an accidental death benefit.
If an accidental death rider covers dismemberment, in general it will pay a percentage of your policy’s overall death benefit. Covered accidents are also limited and typically require you to either lose a limb or body part or become paralyzed.
Return of premium rider
A return of premium rider reimburses you for some or all of the premiums you’ve paid for a term life policy if you outlive the policy term. In other words, if you purchase a 20-year term life insurance policy with this rider and you’re still alive after 20 years, your insurance company would return all or some of the premiums you paid over those 20 years.
Returned funds are often not taxable since premiums are paid for with after-tax dollars, though you should speak with your agent or a financial adviser to understand the specific terms of your policy and rider.
If you die during the policy term, your beneficiary won’t receive a return of premium; the rider only kicks in if you outlive the length of your policy. The rider might also be canceled or the total possible refund might be reduced if you miss any premium payments throughout the policy term.
How life insurance riders work
Riders or endorsements aren’t separate policies. And because riders are optional, you don’t need to include them if you don’t have a need.
How to pay for riders
Riders increase your insurance premiums — how much you pay per month, quarter, or year to keep your policy in force. This means that the more riders you add, the more you’re going to pay for your policy. That said, riders are useful tools for expanding your coverage without needing to take out a separate policy (which would mean a separate bill and underwriting process).
How to buy riders
Some riders must be purchased at the time you buy your policy. In other cases, you may be able to add a rider later. Each insurer has different rules for when and how you can buy a rider — including which riders are available for purchase. Some riders are only available for term life policies (or whole life policies), whereas others can be added to any sort of life insurance policy.
Who’s covered
Some riders limit coverage to the insured person. In other cases, you may be able to extend coverage to your spouse or children. For example, a child term rider can be added to a life insurance policy and would pay out a lump sum if the insured’s child dies.
What’s covered
While life insurance pays out a tax-free death benefit upon your passing whether you have a term or permanent life insurance policy, riders pay out in different ways. However, riders always provide an extra benefit on top of what your base policy pays.
How to file a claim
Filing an insurance rider claim is similar to filing a claim for your regular policy:
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Gather and review your documentation: This includes your policy, rider, and any necessary and relevant information, like medical records, proof of disability, or medical bills.
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Contact your life insurance company: Get in touch with your insurer through your agent or the company’s claims department.
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Work and coordinate with your insurer: Follow your insurer’s instructions for filing a claim, which may require additional documentation or a waiting period before you receive any benefits.
Benefits of life insurance riders
By adding a rider to your policy, you can enhance your coverage to better protect yourself and your loved ones. The benefits of buying a rider include:
Customized coverage
The primary purpose of life insurance is to pay a death benefit when you pass away. Though with permanent coverage you can tap into your policy’s cash value for a loan (which isn’t always advisable), the functions of a life insurance policy are fairly limited.
Riders can enhance and expand coverage to suit your specific needs. For example, if you work as a manual laborer, an AD&D rider can double your policy’s payout if you die on the job — or help cover lost wages if you lose a limb. If certain diseases runs in your family, a critical illness rider can reduce the financial risk following a diagnosis.
Enhanced financial security
A life insurance death benefit pays out a tax-free lump sum to a beneficiary (or beneficiaries) when the insured person dies. This money is often used to cover funeral costs. Leftover funds are typically meant to help pay down remaining medical bills, debt and other expenses.
But in many cases, you and your loved ones incur additional costs long before you pass away. And even with Medicare coverage, custodial or long-term care in a nursing home or facility can get expensive — potentially $200 per day and beyond. An unexpected illness or disability can make it difficult or impossible for you to work, making it difficult for you and your family to make ends meet.
By purchasing a rider, you can customize the coverage of your policy to meet your specific needs and mitigate your concerns.
Flexibility and adaptability
Insurance is generally a static product. Once you buy a policy, it shouldn’t change much — or at all. Unless you add a rider.
The ability to add riders as your life changes means your coverage can evolve over time according to your needs.
For example, you may want to consider adding a critical illness rider as you get older. Or, if you transition from a desk job to something with more risk, an AD&D rider can increase your coverage level.
Tax and cost considerations
Though riders increase your policy premium, they’re generally less expensive than standalone policies.
And, in many cases, adding a rider doesn’t require you to go through the underwriting process (or keeps underwriting to a minimum) and the medical exam that comes with it.
Like the death benefit of your insurance policy, rider benefits are generally not taxable since premiums are paid for with after-tax dollars.
Are life insurance riders worth it?
Only you can decide if a rider is worth it. The best way to do so is by considering your:
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Family and relationships: Riders can extend your life insurance coverage to your spouse and children. Riders can also increase your coverage to include more conditions, protecting you and your family while you’re still living.
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Finances: Lost wages and long-term healthcare costs can cause a serious financial impact. Riders help cover the expenses you incur if you become disabled or seriously ill.
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Job: If you work in a high-risk industry or position, riders can provide extra coverage in case you get hurt or sick from your work.
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Medical history: If your family history has a history of serious illness, adding a rider can reduce the financial risk if you fall ill.
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Plans and life events: Insurance premiums are generally less expensive the younger and healthier you are. Buying a policy and riders before you get married or start a family can maximize your coverage early on.
Financial planning can be complex. A financial professional or insurance agent can help you determine which riders, if any, are best for you, your budget and your plans.
How to evaluate and choose riders
Riders and their coverage vary among insurance companies. If you don’t already have a policy or you’re looking to take out a new policy, shop around to compare riders offered by different insurers.
During this process, you should:
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Prioritize your needs: Riders help you customize your policy to fit your needs. As you evaluate different riders, make sure they address your concerns and fit into your budget.
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Read the terms: Riders sold by one insurer may not provide the same level of coverage as those sold by another. Similarly, definitions can differ between insurers. Read the fine print to make sure you understand what’s covered and what isn’t.
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Understand how the rider works: Some riders will only pay out in very specific situations. Others provide wider broader protection. In some cases, you may have to go through a waiting period before benefits pay out. Before you add a rider to your policy, make sure you understand how it works.
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Buy a rider at the right time: Some riders can only be purchased when you first take out a new policy. Look through your available options to make sure you’re not overlooking a rider you won’t be able to add in the future.
A financial adviser or insurance expert can help you make an informed decision, helping you choose the right rider and coverage levels before you sign any insurance contract.