Understanding life insurance riders, benefits and options

Riders offer added benefits to life insurance

Insurance contracts are full of unfamiliar jargon. This jargon serves an important purpose: to clearly articulate specifics of the life insurance policy.

One bit of that jargon can be a "rider," 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.
• Accessing 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. Riders can typically only be added when you purchase the policy, not after the policy is already in place.

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.

Make sure you have the right coverage for your needs and budget by understanding the differences between life insurance policy types and other life insurance basics. 

Common life insurance riders and options

Let's start with some of the most common riders and options that may be 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 some of the steps normally required if you were buying a new policy.

For example, you can typically avoid going through the medical exam and 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 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. The cost of having this rider on a policy is based on the insured's age and coverage amount.

Child riders

Child riders, also called child term riders, 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 may have living benefits as well. Before the child rider expires, their coverage may be able to be converted into an adult policy without proof of health. This can allow children to get coverage later in life no matter their medical history.

Guaranteed insurability rider

This rider gives you the opportunity to purchase additional life insurance coverage without the need for medical underwriting when you experience significant life changes, such as:

• The birth or adoption of a child.
• Marriage.
• The purchase of a home.
• Some age milestones.

Policies may include this type of benefits rider at no extra cost, and it can be available on permanent or term insurance.

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 death benefit 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 allows you to receive part of the death benefit if you have 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, though, that 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 due to a qualifying accident. It's common with group life insurance and may be included 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 may 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.

Unique riders and options for service members

Some providers offer unique riders designed for service members. These may include:

• A future insurability rider: This could give you the option to replace some or all of your Servicemembers' Group Life Insurance, or SGLI, benefits lost after retiring or separating from the military, regardless of your disability status.
• A severe injury benefit: This could provide benefits if the insured suffers certain injuries in the line of duty.
• Life events option rider: This version of a guaranteed insurability rider covers life events specific to service members and may be 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. That's why you should address it early in life. The longer you wait, the more expensive it may get.