STUDY chapter 5) Riders

Riders Affecting the Death Benefit Amount -The following policy riders have the effect of modifying the death benefit under a life insurance policy.

-Accidental Death Benefit Rider or Multiple Indemnity -Accidental Death and Dismemberment Rider (AD&D) -Guaranteed Insurability Rider (GIR) -Cost of Living Adjustment (COLA) Rider -Return of Premium Rider -Return of Cash Value Rider -Term Rider -Annuity Rider

Accidental Death Benefit Rider or Multiple Indemnity -Accidental Death Rider = Only For Accidental Death -*The Accidental Death Benefit doubles or triples the policy face.* -Life insurance rider which pays an additional sum, termed the principal sum, to the beneficiary if the insured dies due to an accident. -Also applies to accidental death and dismemberment policies in which the policy will pay double or triple the benefit based on dismemberment or death. -Synonymous with multiple indemnity rider.

-The accidental death benefit (ADB) rider, also referred to as a multiple indemnity rider, pays an additional sum, termed the principal sum, to the beneficiary if the insured dies due to an accident. -The amount paid is a multiple of the policy face amount such as double or triple.

Children's Term Rider -Life insurance rider which covers children with term protection, usually until age 21. -Biological, step and legally adopted children can be insured under term riders.

-The children's term rider permits children to be insured under term rider protection on a life insurance policy for a certain length of time. -Children's term riders usually expire when children reach the age of 18 or 21. -When children reach the limiting age, they are usually given the option to convert their term coverage to whole life.

Cost of Living Adjustment (COLA) *COLA = Inflation Protection* -If the face amount is increased, the premium will be increased. -If the face amount is decreased, the premium will be decreased. -If the face amount cannot be adjusted, then an increasing term rider is added to the coverage.

-The cost of living adjustment (COLA) rider allows the policy face amount to be adjusted to account for inflation based on the consumer price index (CPI). -The policyowner has the option of accepting or declining such changes to the policy.

return of cash value -The return of cash value rider was created as a response to policyowners who misunderstood how cash value in permanent life insurance accrues interest to equal the policy face amount.

-The return of cash value rider allows a whole life policy's cash value to be included in the death benefit. -Similar to the return of premium rider, *this rider doesn't actually return the policyowner's cash value; instead, the rider provides the additional benefit through an increasing term rider that always equals the policy's cash value.*

Substitute Insured Rider or Exchange Privilege Rider. -*Substitute Insured Rider = Used In Business Life* -*The substitute insured rider, also known as the exchange privilege rider, allows the insured under a life insurance policy to be changed.*

-The substitute insured rider is useful for business life insurance contracts where key employees change employers or retire. -Rather than go through the policy replacement process, the substitute insured rider allows the policy to continue with the same face amount; however, the policy premiums will be refigured based on the new insured's age, health, sex, and insurability.

Waiver of Cost of Insurance; *The waiver of cost of insurance, or waiver of monthly deductions rider, is a Life insurance rider that allows a universal life policyowner who becomes disabled to waive the cost of death protection but does not waive the cost of premium required to build cash value.*

-The waiver of cost of insurance, or waiver of monthly deductions rider, allows a universal life policyowner who becomes disabled to waive the cost of death protection, but does not waive the cost of premium required to build cash value. -Example: If the minimum premium is $900 and the target premium is $1100, the waiver of cost of insurance rider will only cover the $900 to keep the death protection in force

Term Rider

A term rider adds term coverage to an existing life insurance policy. There are several varieties of term riders, including: Spouse/other insured, Children, Family, Return of premium and Return of cash value.

Long-term Care Rider

*A type of accelerated benefit* which is used to pay long-term care costs.

Living Needs Rider

*Integrated accelerated benefit* which pays the accelerated benefit as long as the insured is expected to die within one or two years.

*Family Term Rider* -Combines the spouse and children's term rider in one rider.

-When a family term rider is added to permanent coverage, then the family term rider is level term.

Annuities

A contract which protects against the risk or living longer than expected. Annuities provide a guaranteed life income to protect against the risk of depleting retirement funds.

Waiver of Premium Rider

Life insurance rider that allows the policyowner to waive premium payments during a disability, and keeps the life insurance policy in force as long as the disability is total and permanent.

Cost of Living Adjustment (COLA) *COLA = Inflation Protection*

Policy rider that automatically increases the insured's disability income benefits to account for inflation.

Principal Sum

The face amount of AD&D coverage which is paid out if the insured loses two limbs, two hands, two feet, vision in both eyes, or dies as a result of an accident.

Accidental Death and Dismemberment Rider (AD&D) *AD&D Rider = Pays Principal Sum* -The accidental death and dismemberment rider pays a principal sum if the insured loses any of the following due to an accident: Both hands Both arms Both legs Vision in both eyes

-The accidental death and dismemberment rider may be added to a life insurance policy to pay benefits for dismemberment. -The loss must occur within a certain time period of the accident, such as 90 days.

Guaranteed Insurability Rider (GIR); Synonymous with future increase option. *Guaranteed Insurability = Increase Coverage without Proof of Insurability*

-The guaranteed insurability rider (GIR), sometimes referred to as the future increase option, permits the policyowner to buy additional permanent life insurance coverage at specific points in time in the future (i.e., marriage, births, etc.) without requiring the insured to provide *proof of insurability.* -If the future increase option is not exercised within a specified time period, such as 90 days, of each option age, then the option is forgone. -The added coverage is rated at the insured's attained age.

Payor Rider *Juvenile policies use Payor Riders.*

-The payor rider is used for juvenile life insurance. -The payor rider states that if the individual paying the premiums becomes disabled or dies before the child reaches a certain age, such as 21 or 25, the policy premiums will be waived until the child reaches the specified age. -The policy will stay in force while the premiums are waived. -This rider protects parents or guardians who purchase life insurance on their children from lapsing coverage if they become disabled or die before the child is of age to assume policy ownership.

Accelerated Benefit Rider *Long-term Care Rider = Accelerated Benefits Rider* -A living needs rider may pay up to 80% of the death benefit. Prior hospitalization is often required for the *living needs rider* to kick in. -An example of the integrated accelerated benefit is the *living needs rider* that pays the accelerated benefit as long as the insured is expected to die within one to two years.

-*The long-term care rider* is a type of accelerated benefit, which is used to pay long-term care costs. -The *long-term care rider* may be separate from the life policy, in which case the accelerated benefit does not reduce the death benefit, or may be incorporated into the life insurance policy, thereby reducing the death benefit or policy cash value.

Spouse & Other-insured Term Rider

-The spouse other-insured term rider gives term protection for a specific period of time and amount. -The rider typically expires when the spouse/other-insured reaches a certain age, such as 65.

Accidental Death and Dismemberment (AD&D); *AD&D = Die From Accident* -Standalone accident-only policy which only pays benefits if an insured dies or has a dismembered body part as a result of an accident.

Accidental death and dismemberment (AD&D) policies pay a lump sum payment if the insured dies in an accident, or loses major body parts in an accident.

Return of Premium Rider

Life insurance rider that pays the total amount of premiums paid into the policy in addition to the policy face amount upon the insured's death.

Universal Life

Life insurance that allows the policyowner to buy term and invest the difference. Synonymous with unbundled life insurance and flexible premium adjustable life.

Disability Riders

-As stated earlier, riders "ride on" existing policies. -Riders add to or take away from policy benefits. -The rider, synonymous with "endorsement," is attached to the policy. -Riders customize policies to meet policyowners' unique needs.

Guaranteed Insurability Rider (GIR); Synonymous with future increase option. *Guaranteed Insurability = Increase Coverage without Proof of Insurability*

-Each policy specifies how much additional coverage can be purchased. -The GIR is not exclusive of other riders, so if the policyowner has the waiver of premium rider and the GIR, it is possible for both riders to be exercised simultaneously. -The guaranteed insurability rider usually drops off when the insured reaches the age of 40.

Disability Income Rider *Disability Income = Pays Income on Face Amount, Weekly or Monthly*

-If the policyowner becomes totally and permanently disabled, the insurer will pay the insured a periodic income, and in some policies, it also waives the policy premiums. -The periodic income is based on the policy's face amount and is paid weekly or monthly during the insured's disability. -There is usually a waiting period of 3 or 6 months once the policyowner becomes disabled to establish that the disability is permanent.

Accidental Death Benefit Rider or Multiple Indemnity -Accidental Death Rider = Only For Accidental Death -*The Accidental Death Benefit doubles or triples the policy face.* -The ADB typically expires when the insured reaches a certain age, such as 65. -The ADB does not build cash value and only multiplies the policy's face amount. -If a policy's face amount is increased by dividend options, then the ADB only applies to the original policy face amount.

-Each policy stipulates how an accidental death is defined. Furthermore, the insured must die within a certain time period of the accident, usually 90 days. -The rider usually excludes death from accidents occurring while the insured is at war, committing a crime, or is in an aviation incident, other than in a regularly scheduled commercial flight.

Conditions for Payment

-In order for an insured to receive the accelerated benefit, the insured must have a terminal illness, or in some policies confinement to a nursing home suffices for payment. -The amount of the accelerated benefit varies by policy, but is usually anywhere from 25% - 80%. -Insurers are permitted to pay out the entire death benefit. -The accelerated benefit is not subject to tax, since the funds are used to pay for medical care.

Guaranteed Insurability Rider (GIR); Synonymous with future increase option. *Guaranteed Insurability = Increase Coverage without Proof of Insurability*

-Life insurance rider that permits the policyowner to purchase additional amounts of whole life coverage at specific points in the future. -Also applies to disability income insurance permitting the insured to purchase additional disability income coverage at future dates. Synonymous with future increase option.

*Effect on Death Benefit* face amount-accelerated benefits paid= death benefit proceedings -The death benefit is the face amount reduced by the amount of accelerated benefit paid to the insured.

Example: If Linda has a $100,000 life insurance policy and receives $40,000 accelerated benefits for her terminal illness and the insurer loses $200 of interest, then Linda's beneficiary will receive $59,800 in death benefits when she dies.

Return of Cash Value Rider

Life insurance rider that pays the amount of the policy cash value in addition to the policy face amount upon the insured's death.

Under what conditions will the waiver of premium rider pay benefits? Select one: a. If the insured is disabled b. If the insured is partially disabled c. If the insured is totally disabled d. If the insured is totally and permanently disabled

The waiver of premium rider stipulates that the insured must be totally and permanently disabled in order to pay benefits. The correct answer is: If the insured is totally and permanently disabled

Return of Premium Rider -The return of premium rider pays the total amount of premiums paid into the policy *as long as the insured dies within a certain time period specified in the policy.* -The death benefit is comprised of the face amount plus the total premiums paid into the policy.

-Most policies drop the return of premium rider when the insured reaches age 60. -The return of premium rider is simply an increasing term rider that matches the total premium input. -This rider can be costly because as the insured ages, the cost of term protection increases.

Riders Covering Additional Insured -The following riders can be attached to life insurance policies, and cover additional individuals.

-Spouse & Other-insured Term Rider. -Children's Term Rider. -Family Term Rider

Waiver of Premium *Waiver of Premium = Waives Premium for Total Disability* -The waiver of premium rider can only be added to a term policy because there is no cash value. -Example: Becky becomes disabled 10 months before she turns 65 and her disability lasts for 36 months. Under the waiver of premium clause, the company will waive her premiums for 30 months (36 months - 6 months waiting period).

-The waiver of premium rider allows the policyowner to waive premium payments during a disability, and keeps the policy in force. -Waiver of premium rider coverage requires an additional premium charge. -The waiver of premium rider is an option that may be rated or denied by the insurer. -The disability must be total and permanent. -The waiver of premium rider can only be added to a term policy because there is no cash value.

Accelerated Benefit Rider *Long-term Care Rider = Accelerated Benefits Rider* -Life insurance rider which allows the insured to receive a portion of the death benefit prior to death if the insured has a terminal illness.

-The accelerated benefit rider, also referred to as a living benefit rider, allows the insured to receive a portion of the death benefit prior to death if the insured has a terminal illness. -Depending on the policy, life insurance premiums may be waived upon payment of the accelerated benefit.

Accelerated Benefit Rider *Long-term Care Rider = Accelerated Benefits Rider* -Life insurance rider which allows the insured to receive a portion of the death benefit prior to death if the insured has a terminal illness.

-This accelerated benefit rider is intended to provide a terminally ill insured with necessary funds to pay medical expenses and nursing home costs during a terminal illness while the insured is living, and relieves financial burdens associated with terminal illness.

Annuity Rider

An annuity rider can be added onto a life insurance policy. Annuities, which protect against the chance of depleting income for prolonged life, are discussed in detail in a later chapter.

Waiver of Premium *Waiver of Premium = Waives Premium for Total Disability* -The waiver of premium rider can only be added to a term policy because there is no cash value. -Example: Becky becomes disabled 10 months before she turns 65 and her disability lasts for 36 months. Under the waiver of premium clause, the company will waive her premiums for 30 months (36 months - 6 months waiting period).

-After a certain age (usually 60 or 65), the waiver of premium rider is void. -If the policyowner becomes disabled right before the rider expiration date, the rider will still apply. -There is usually a waiting period of 3 or 6 months once the policyowner becomes disabled before the first premium will be waived. -The policyowner is not required to pay back the waived premiums if they recover from the disability.