Other Life Insurance Options and Riders
The following options and riders are not needed or wanted by many people, so they are usually priced separately.
The waiver-of-premium option frees the insured from paying premiums if he becomes disabled before a certain age, typically 60 or 65. Dividends continue to be paid and cash value continues to increase just as if the premiums had been paid. There is generally a 6 month waiting period after disability. The insured must continue to pay premiums for 6 months after the disability. Some older policies will refund these premiums if disability is longer than 6 months, but most new policies will not offer refunds. The insured must be disabled as defined by his policy, and he must provide evidence of disability to his insurer. Disability is generally defined as the inability to perform the duties of any occupation for which the insured has education and experience.
The guaranteed-insurability option (aka guaranteed purchase option) guarantees that the insured will be able to purchase additional insurance at regular intervals without providing evidence of insurability up to a specified age limit, which is usually in the 40s. This option typically allows the insured to purchase additional amounts of insurance up to the face value of the original policy every 3 years. Thus, the number of purchase options is limited by the age of the insured, and the total amount of additional insurance that can be purchased will depend on the face value of the original policy and the number of purchase options available. The main benefit of the guaranteed insurability option is that it allows the insured to increase the insurance as his income rises, and as his family grows. Also, there are usually no renewed periods for incontestability or the suicide exclusion when the purchase option is exercised.
If the insured does not exercise the option when it becomes available within 30 or 60 days, depending on the policy, then it cannot be exercised later on. The total number of purchase options will be reduced. To prevent adverse selection, some insurers terminate the option if the insured does not exercise the option as it becomes available.
Most policies also have an advance purchase privilege, which allows the insured to purchase additional insurance within 90 days of marriage or the birth of a child. Some policies provide 90 days of term insurance until the insured exercises the advance purchase privilege. After 90 days, the advance purchase privilege and the term insurance expire. If the insured does exercise the advance purchase privilege, then the guaranteed purchase option cannot be exercised on the usual date, but the insured will have to wait until the following exercise date to purchase additional insurance. In other words, the advance purchase privilege allows the insured to exercise the option earlier, but does not increase the number of times that the guaranteed purchase option can be exercised.
The cost-of-living rider allows the policyholder to buy 1 year term insurance for the amount of the policy times the increase in consumer prices, as measured by the consumer price index, for the previous year without providing evidence of insurability. So, if prices increased by 3%, then a policyholder with a $100,000 policy can buy term insurance in the 1st year for $3,000. The term insurance can be renewed each year for the cumulative price increase since the purchase of the policy. So, if 5 years later after the policy was purchased, prices increased 12%, then the policyholder will be able to purchase term insurance for $12,000 on a $100,000 policy. The term insurance can also be converted to a cash value policy without providing evidence of insurability.
Accelerated Death Benefits Rider
The accelerated death benefits rider allows the insured to collect some or all the life insurance proceeds while still alive if the insured is suffering from a terminal or catastrophic illness, or requires long-term care. The money paid is discounted by the time value of the money. The face amount of the insurance and the cash value are reduced by the amount taken out, and premiums are reduced by the percentage of reduction in the face amount of the insurance. Thus, if $60,000 is taken out of a $100,000 policy, then the face value of the policy is reduced to $40,000, and the premiums will be reduced to 40% of their original amount. Although $60,000 is taken out, the insured will get a few thousand less—the exact amount will depend on the interest rate used to calculate the time value of the money.
The terminal illness rider applies to illnesses where the insured's life expectancy is short, typically less than 24 months.
The catastrophic illness rider applies to diseases that costs a great deal of money to treat, but the patient may live longer than 2 years or has an indeterminate life expectancy. Such diseases include heart disease, cancer, kidney failure, AIDS, and other such diseases.
The long-term care rider applies to insureds that require long term care in a nursing home or other such facility, or, in some cases, home care. The money is often paid monthly, since this method lessens the time-value discount, and so provides more money for the insured.
Another method of getting money from a life insurance policy while the insured is still alive is by selling the policy to a company or individual who buys such policies at a discount, which is called a viatical settlement. A rider is not necessary in this case, since most life insurance policies can be sold. In fact, these policies are collected and sold to investment banks, which securitizes them, and sells them to the investing public as bonds, which are often referred to as death bonds.
The double-indemnity option (aka accidental death benefit rider) pays double, or in some cases, triple the amount of the insurance if death occurs by accident. For this option to apply,
- the proximate cause of death must be an accident;
- death must occur within a short time of the accident, typically 90 or 180 days;
- and before a certain age, typically 60 or 70.
The limitations exist to help establish that death was, indeed, caused by accident. The age limitation exists because age diminishes a person's ability to survive accidents. Thus, an accident that a 25 year old could easily survive could easily kill an 80 year old.
Generally, the double-indemnity option is not worthwhile. Although it is cheap, it is cheap because most people die from disease, not from an accident. The only situation where the double-indemnity option might make sense is for a young person with a growing family. Accidents are the major cause of death of young people, so if death did occur at an early age, the extra protection could benefit the surviving family immensely. After the children are grown, and as the insured ages, the need for the double-indemnity option lessens significantly.