Understanding life insurance riders, benefits and options

Information courtesy of USAA Life Insurance Company and USAA Life Insurance Company of New York

What are life insurance riders, benefits and options?

Insurance contracts are full of unfamiliar jargon, and although it can be confusing, this jargon serves an important purpose — to clearly articulate specifics of the life insurance policy.

One of those words is: "rider", which refers to a clause in the policy that provides added benefits. Some of these options include:

• Buying more coverage.
• Converting one policy type to another.
• Increasing the policy's death benefit or cash value.
• Getting the policy's death benefit early under certain circumstances.

Some riders are standard policy features, depending on the provider. Others are add-ons that increase the cost of the policy.

And some riders are specific to certain types of life insurance. For example, a rider might not be available for permanent coverage but could be for term life insurance.

Learn more about the differences between types, along with some other basics, by reading Life Insurance 101.

Common life insurance riders and options

Let's start with some of the most common riders and options offered by a life insurance company.

Conversion option

This allows you to convert all or part of your term insurance into a permanent life insurance policy. The idea is you get to skip many of the steps normally required if you were buying a new policy.

For example, you can avoid going through the medical exam and can get approved regardless of health with a conversion feature.

Conversion is standard on many term policies, but not all contracts allow it. Some policies have specifics on things like when you can convert and what type of permanent insurance you can convert to.

Waiver of premium rider

The waiver of premium rider^{See note1See note,See note2} applies if the insured becomes disabled due to a covered illness or accident. It states that the insurance company will pay the premiums during the disability period.

This is often called a "waiver of monthly deduction" in universal life policies. The cost of having this rider on a policy is based on the insured's age and coverage amount.

Child riders

Child riders,^{See note3} also called "child term riders," these allow you to buy extra coverage for each child in your household. It often comes in smaller coverage amounts and can help a family with final expenses.

Adding a child rider to a life insurance plan has living benefits as well. Before the child rider expires, their coverage can convert into an adult policy without giving a record of health. This allows children to get coverage later in life no matter their medical history.

Guaranteed insurability rider

This gives you the option to buy more life insurance at certain life events. It's available without underwriting during events like:

• Birth or adoption of a child.
• Marriage.
• Purchase of a home.
• Some age milestones.

Policies often include this type of benefits rider at no extra cost.

Less common riders and options

While less common, these riders and options might still play important roles in the policy.

Return-of-premium rider

Term life insurance policies sometimes offer this as a rider or as a standard feature. It pays the insured back for part of the premium if they outlive the contract. The trade-off is potentially higher premiums.

Long-term care rider

This rider allows the insured to use part of their policy value to cover long-term care expenses while they're still alive.

A long-term care rider is different from long-term care insurance. A long-term care insurance policy is a standalone policy meant to cover the same costs.

This rider has its own benefits and drawbacks, but it can be a useful part of a caregivers' plan to pay for long-term care.

The long-term care rider is also often confused with the accelerated death benefit.

Accelerated death benefit

The accelerated death benefit^{See note4} allows you to receive part of the death benefit if you get a terminal illness before the policy's maturity date. Some policies may call it an "early benefit payment" or "terminal illness rider."

Keep in mind, you might have to pay taxes on the accelerated benefit payment. But according to the IRS, benefits aren't subject to income tax "if the insured has been certified by a physician as terminally ill."

Accidental death benefit

The accidental death benefit increases the death benefit amount if the insured's death is an accident. It's common with group life insurance and is often on policies with a lower base coverage amount. The cost of adding an accidental death benefit depends on the amount of extra coverage and other factors.

These policies may also exclude certain types of accidental deaths, depending on the contract's wording.

Family rider

Similar to a child rider, this one provides coverage for your spouse. It also has a conversion clause allowing your spouse to get a standalone policy on their life with little or no evidence of insurability.

Paid-up additions rider

This option is available on some whole life insurance policies. These policies typically pay dividends that allow the cash value to grow at a quicker rate than that of a simplified whole life policy.

There are many ways you can use the nonguaranteed dividend payout. One option is that the dividends can be used to buy more insurance coverage. This allows you to increase protection over time without proof of insurability.

Exercising a paid-up addition rider in your whole life policy may increase the cash value as well.

Unique riders and options for service members

Some providers offer unique riders designed for service members, such as USAA's Military Protection Plus.^{See note5} These include:

• Military future insurability rider. This gives you the option to replace some or all of your Servicemembers' Group Life Insurance (SGLI) benefits lost after retiring or separating from the military, regardless of your disability status.
• Military severe injury benefit. This provides benefits if the insured suffers certain injuries in the line of duty.
• Life events option rider.^{See note6See note,See note7} This version of a guaranteed insurability rider covers life events specific to service members and is available on certain term and permanent policies.

Life insurance is best bought early.

Choosing the right life insurance for your situation is an important part of a strong financial plan. Which is why you should address it early in life. The longer you wait, the more expensive it gets.