When it comes to choosing a life insurance policy, doctors are in a challenging position. Most physicians’ families rely on their income to provide for basic living expenses as well future savings. In the event that a physician passes away, life insurance provides an essential financial safety net for their loved ones. However, because physicians tend to be high-earners, they are also targeted by salespeople trying to sell bloated, overly-expensive life insurance policies.
Understanding the value of different life insurance riders can help physicians make informed decisions about their insurance coverage. Life insurance riders are additional coverage provisions that can be purchased along with a basic policy. While some riders are free, others will increase the monthly cost of your policy. Riders are a strategic way to customize your life insurance to meet your unique needs, however not all riders are appropriate for all physicians. The riders that are most financially prudent for you will depend on your coverage from other forms of insurance, your medical history, your family’s financial resources, and your long-term savings and investments.
Here are nine of the most common life insurance riders:
For an additional fee, physicians may add a waiver of premium rider to their policy which allows the policy holder to forgo insurance premium payments in the event that he or she becomes critically ill, seriously injured, or disabled. This type of rider is sometimes known as a disability waiver rider. With this rider, a policyholder who suffers a qualifying disability can keep their policy in effect even if an illness or injury prevents them from earning income and paying their regular monthly insurance premiums. If and when the policyholder recovers from their disability, the policy insurance premiums will be reinstated.
Waiver of premium riders typically include a waiting period of at least 6 months which must elapse after the onset of a disability before the policy’s insurance premium will be waived. There are also strict conditions to qualify for a waiver of premium rider, as a policyholder must meet certain health and age requirements. Serious pre-existing conditions will be permanently excluded from the coverage of the rider, and most riders include very specific definitions for “disability.” While some waivers may go into effect if the policyholder is too sick or injured to work in their profession of training and expertise, other versions of this rider may only waive insurance premiums if the policyholder is too disabled to work at all in any profession.
It is important to note that a waiver of premium rider does not offer income replacement in the event of a disability, it simply eliminates the cost of insurance premiums while keeping the policy in effect.
A Term Conversion Rider allows the policyholder of a term life insurance policy to convert their policy into a permanent policy (also known as a lifetime policy) by a specified deadline. By definition, term life insurance policies are only designed to last for a designated period of time. However, as the policy nears its guaranteed fixed price termination date, many policyholders may decide they wish to continue their life insurance coverage by converting to a permanent policy.
A Term Conversion Rider can be added to a term life insurance policy at the time of purchase, often for no additional cost. This rider guarantees that you have the option to convert all or some of your policy benefits into a permanent policy by a designated date, with no additional medical underwriting. This feature allows a policyholder to continue to receive coverage based on their original health rating from the time they first purchased their term policy, regardless of any health conditions that may have arisen since the policy’s effective date. This guarantee is extremely important for anyone who has developed a serious health condition such cancer, heart disease, or diabetes, because it locks in coverage for a lifetime. If you wanted to purchase a policy after being diagnosed with one of these conditions, your options for life insurance would be slim to none.
While a basic conversion rider does let you keep your future coverage options open, there are specific timeframes by which you must request a conversion. While the exact requirements may vary by insurance company, the following are examples of conversion periods for basic term conversion riders:
Note, the examples above show far more lenient time frames than many carriers offer for term conversion riders. In fact many highly-rated carriers only allow policyholders to convert within the first half of their policy time frame. For example, an insurance company many only allow you to convert within the first ten years of a 20 year policy, or even the first ten years of a 30 year policy.
For policyholders who wish to preserve the option to convert their term policy until beyond even the basic conversion periods, there are also conversion extension riders. For an additional cost, the conversion extension rider allows policyholders to extend their opportunity to convert their policy. For example, while a basic term conversion rider on a 15-year term policy may require the policyholder to convert their coverage within the first ten years of the policy, a conversion extension rider would allow the policyholder to decide within the first 12 years of the policy (or until the policyholder reaches the age of 70, whichever comes first). A conversion extension rider must be purchased with the original policy, it cannot be added on later. This extension rider is usually very low cost for shorter term policies and well worth the price to add the additional years. Many of them provide an extension for the entire duration of a policy, even as long as 30 years.
An Accelerated Death Benefit Rider is a special provision that allows policyholders to access a portion of their policy’s death benefits while they are still alive in the event that they are diagnosed with a terminal illness. This common policy addition is usually available at no additional cost. Accelerated death benefits will reduce the amount of money paid out to beneficiaries as if it is an advance on the future death benefit.
There may be a limit on the amount of accelerated death payouts that policyholders may receive while still alive. Typically, accelerated death benefits are not subject to income tax, although in some cases the payouts may be subject to fees and interest. In order to qualify for early payouts, the policyholder must provide medical certification that they are suffering from a qualifying condition. Accelerated Death Benefit Riders may have different names depending on the provider, or you may be able to choose between different types of Accelerated Death Benefit Riders specifically related to terminal, critical, or chronic illnesses. Let’s explore two common variants on the Accelerated Death Benefit Rider, the Critical Illness Rider and the Chronic Illness Rider.
A Critical Illness Rider is a type of accelerated death benefit rider which pays out benefits while the policyholder is still alive in the event of a critical illness diagnosis. A Critical Illness Rider will define specific conditions that qualify as a critical illness. Commonly covered diagnoses include stroke, kidney failure, ALS, and certain types of cancer.
The accelerated payouts from a Critical Illness Rider can be used at the policyholder’s discretion, and these benefits go toward medical costs or basic living expenses. Accelerated payouts are taken from the value of the policy’s death benefit, and the remaining value is disbursed as a lump sum to the beneficiaries if the policyholder passes away. Note: A Critical Illness Rider gives the insured individual the choice to accelerate their benefits in the event of a serious illness. If the insured opts not to collect early benefits, they can maintain their traditional benefit for the policy beneficiaries.
Similar to a Critical Illness Rider, a Chronic Illness Rider is another provision offering accelerated death benefits in the event of a serious medical diagnosis. A Chronic Illness Rider allows the policyholder to receive benefits from their policy while still living, in the event that they suffer a disabling illness that prevents them performing at least two of the six Activities of Daily Living (ADLs). The six ADLs are eating, bathing, getting dressed, using the bathroom, transferring and continence.
Doctors who do not wish to purchase separate long-term care coverage have the option to add a Long-Term Care Rider to their life insurance policy. Long-term care (LTC) refers to personal or custodial care for individuals who need assistance with basic daily activities, such as dressing, bathing, eating, using the restroom or moving around a home. Long term care includes support provided to an individual either in their home or in a facility such as a nursing home, and the cost of long term care is not covered by health insurance.
A long-term care rider allows the policyholder to receive accelerated payouts from the death benefit if they require long-term care. These benefits may be funded with a lump sum payment or installments, and then any unused LTC money is paid out in the policy’s death benefit.
If you’re interested in bundling your long-term care planning with your life insurance, ask your financial consultant about life insurance policies with an LTC rider. If you already have life insurance, it may be possible to add an LTC rider to your existing policy.
An Accidental Death and Dismemberment Rider (AD&D) provides an increased benefit in the event that the policyholder suffers an accidental death or dismemberment. In the event of the unthinkable, an AD&D rider could provide up to double the payout, however, pay close attention to the fine print as these riders tend to include very restrictive language.
In a typical AD&D rider, if you die as a result of an accident, the insurance company will pay up to twice the amount of the original death benefit. These riders include very specific language defining what events qualify as an accidental death. AD&Ds typically covers drownings, homicide, falls, machinery accidents, traffic accidents, and exposure to the elements. There are also restrictions relating to when the death can occur in order to qualify for AD&D benefits. For example, if the policyholder passes away from injuries related to an accident more than six months after the incident, they may not qualify for the larger payout.
The second portion of an AD&D rider relates to increased benefits in the event of dismemberment. In the event that a policyholder with an AD&D rider loses a limb (such as an arm, leg, foot, hand, or fingers) or the loss of use a body part (such as paralysis, loss of eyesight, or loss of hearing), the policy will pay out additional benefits while the insured individual is still living. An AD&D rider is not an accelerated death benefit rider, meaning the additional payouts received in the event of a dismembering accident will not reduce the death benefit paid out to the policy’s beneficiaries. However, policy language related to dismemberment coverage can also be exclusionary and restrictive. For example, some policies may pay out different amounts depending on how many limbs are lost in an accident. The specific terms of AD&D riders can vary significantly between insurance companies, so pay close attention to the specific situations that are and are not covered.
Another rider choice offered by many life insurance companies is the Child Protection Rider (also known as a Child’s Life Insurance Rider). For an additional cost, Child Protection Riders offer value in two key ways: First, a financial cushion in the event that a child passes away. Second, when a child ages out of coverage, the policy can be converted into a permanent insurance policy as a gift for your child.
First, the Child Protection Rider offers a death benefit in the event that a child of the policyholder passes away. A child’s death is an unparalleled loss, but should the worst-case scenario occur, this rider is designed to offer financial support for parents during a time of unimaginable grief. A Child Protection Rider can cover funeral expenses, hospitals bills, and provide a degree of financial support if the parents need to take time off of work to grieve.
Fortunately, the vast majority of policyholders will never need to use the benefits provided by a Child Protection Rider. Each individual rider will specify a time frame of coverage, and most children age out of coverage in their early to mid-twenties. At this point, the policyholder usually has the option to convert their Child Protection Rider into a permanent life insurance policy.
The Child Protection Rider serves as a great way to provide protection for children without having to go through a separate process to secure coverage for them individually.
To determine which life insurance riders will offer you the most value and protection, consult with a fiduciary financial planner. Our trusted financial planners can help you take stock of your life insurance needs, make sense of the fine print, and evaluate different policy types. To make sure your life insurance provides all the necessary coverage without the unnecessary fees and charges, make an appointment to talk with an advisor today.
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