Why do life insurance policies come with riders?

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Why do life insurance policies come with riders?

Term life insurance is a good choice for almost anyone. With rare exceptions – like being Bruce Wayne-level rich – we could all use a financial safety net to protect our family in case the worst happens.

Of course, just because we all need life insurance doesn’t mean we need the same life insurance. The coverage you need, such as the term length and the death benefit amount, will depend on your individual financial needs and the costs that your family would need to cover if you were to die.

Having the policy that’s right for you is important. Including riders will allow you to customize your policy even further, meaning you can tailor it to fit exactly what you need.

What are riders?

Riders are modifications to your overall life insurance policy that turn a basic life insurance policy – you pay premiums and a death benefit is paid out if you die – into something that covers more exotic circumstances.

Take child riders, for instance. We typically don’t suggest life insurance for children, because the main point is to cover expenses when the main breadwinner is gone. Chances are that excludes your 3-year-old.

But say you want to have something affordable that will allow you to cover funeral costs if the worst happens. You could buy a separate life insurance policy for her, but it’ll probably be a whole life policy and those are confusing and expensive, which defeats the purpose of a simple, cheap solution to life insurance.

A child rider, on the other hand, is something you add to your own life insurance policy, and for another $50 a year you can add a few thousand dollars of coverage for all of your kids.

That, in essence, is what riders do. It takes your policy and adds additional coverage, a different payout structure, or more to it – usually at an added price – so you can use it the way you want to. If you aren’t planning on having children, a child rider is worthless to you. But a couple with four kids might see the benefit. This way, people in both scenarios can have the protection of a life insurance policy that fits their needs.

Plus, it’s good business for the insurer: they can cover as many people as possible and they don’t need a thousand different life insurance policies for every eventuality. They can offer a few base policies and let customers adapt them.

Examples of riders to consider

Okay, so you know what riders are and why you might use them. But what riders should you even think about in the first place? Here are a few of the most popular choices.

  • Accelerated death benefit. Usually the death benefit isn’t paid out to your beneficiaries until after you die. With an accelerated benefit rider, though, you can have some or all of the death benefit paid out beforehand in the case of terminal illness. That will allow you to pay for expensive treatments instead of forcing your family to deal with unpaid medical bills when you’re gone.

  • Waiver of premiums. You need to pay your premiums in order to keep your policy in force, which is hard to do if you become disabled and can’t work. A waiver of premium rider allows you to hold off on paying your premiums – while keeping your policy in effect – until your disability ends. If this sounds like something long-term disability would help with...well, you’re right. But if you don’t have disability insurance, this rider can be a welcome reprieve from at least one expense.

  • Term conversion. The point of a term life insurance policy is to terminate when the term is up, because at that point you’ll probably have fewer expenses (mortgage, college, kids) and won’t require the death benefit. If you want continued protection, though, a term conversion rider lets you convert a term life insurance policy into a permanent policy without taking another paramedical exam – a welcome adjustment, because taking an exam when you’re old enough for your term policy to have expired would likely make the premiums prohibitively expensive. Term conversion riders are usually included in every term policy.

You can check out our article here for more riders that might come in handy.

A good broker or agent will let you know what riders are available for an insurer’s individual policies. Take a look at them to see if there are any you may need, but be realistic about your situation. Sometimes insurers will include certain riders by default in the policies they offer. But sometimes riders can cost extra, so don’t pay for more than you’ll need or you’ll risk ending up with a policy that cost you more than it needed to.