What are Term Life Insurance Riders?
Term riders are optional clauses that can be built into your term life insurance policy for an extra cost. These add-ons make your insurance more flexible, with options to buy additional coverage or switch to permanent coverage at select times throughout the policy. Why would you need that? Because life is unpredictable, and your insurance needs at the beginning of a 10- or 20-year policy could easily change during that period. Term riders accommodate those kinds of changes.
Need more info on riders in general? Start here for an overview of what life insurance riders are, how they work, and the different options available to you.
The Case for Term Life Insurance Riders
Since term life insurance only covers you for a set time period (and only pays out if you pass away within that period), term riders are geared toward making sure you can get more coverage if necessary.
Term life riders come in handy any time your financial obligations change in a big way and, with them, your life insurance needs. Here are just a few examples where term life riders might be important:
- A growing family: You buy a twenty-year term life policy when you have your first child. A few years down the road, you have another kid — and realize that the original death benefit wouldn‘t cover the cost of raising and educating two children if something happened to you. Being able to purchase extra coverage would let you secure the right amount of insurance for your growing family.
- A lifelong dependent: After you purchase a term life policy, you find out that you’re likely to have a long-term dependent (for instance, a child with special needs or a parent who requires assisted living). In this situation, you might choose to convert your term life policy to a permanent policy to ensure that those dependents would receive the care and financial support they need, no matter what happens.
- A health complication: One big advantage of term riders is that when you use them to get more coverage or convert your policy the insurance company doesn’t require a second medical exam. That means that if you’ve developed health complications during the term, you’ll be able to purchase more coverage at a much lower cost than buying a whole new policy (which would take your new health status into consideration).
- A bigger estate: Not all life insurance scenarios are grim. You could have an unexpected financial windfall during your term life coverage — which would be a welcome development, but might change the way you look at end-of-life and estate planning costs. Converting term insurance to a whole life policy is one way to secure your financial legacy and protect your dependents from hefty estate taxes.
There are plenty of other scenarios worth considering, too. The main thing to ask yourself when choosing term life coverage is how many major financial events might lie ahead of you. If you foresee your finances and coverage needs being shaken up throughout your policy’s term, it’s worth considering riders that would make your insurance more flexible.
Examples of Term Life Insurance Riders
Guaranteed insurability riders
A guaranteed insurability rider gives you the right to increase your policy’s death benefit during the original term without undergoing a second medical exam. Prices will still go up if you opt to increase your coverage, as a bigger face value always means higher rates — however, the price increase will be much more reasonable than it would be if you had to take a second exam and were placed in a lower “health tier.”
Guaranteed insurability riders normally offer you the chance to up your coverage at select times; say, every three years, or at predetermined ages that are meant to coincide with important life events (like having a child or taking on a mortgage). Keep in mind that if you do select this rider, you have the option to keep your original death benefit at any of these milestones — you won’t be required to increase your policy’s value at any point.
Term conversion riders
A term conversion rider gives you the right to convert your term life policy to permanent life insurance. That means your coverage will no longer have an expiration date, and your beneficiaries will be guaranteed a death benefit payout (so long as you keep up with premiums throughout the duration of the policy).
A couple of things worth noting about term conversion: If you do choose to convert your policy at any point, the increase in premiums will be significant, as permanent life insurance is much more expensive than term life. In addition, there are usually time limits around when you can use this benefit — for instance, many companies set a conversion age requirement (e.g. you could only convert without a medical exam before age 75).
Despite the terms and conditions, policy conversion still offers a valuable opportunity. Those that convert within the given time limit, and don’t have to go through a medical exam, will pay far less for permanent insurance than they would if they bought a separate policy after their term insurance expired. For anyone who ends up needing lifelong coverage, term conversion is a decent price compromise.
Return of premium riders
With a return of premium (ROP) rider, premiums you’ve paid throughout your policy will be refunded if you outlive the coverage term. For example: Say you buy a 15-year policy with ROP at $100 per month and outlive it — you stand to be refunded up to $18,000. Of course, because of the potential payout this poses for insurers, they charge a lot more for ROP than for many other riders. Adding return of premium often raises premiums by 30% or more.
- Before you can choose the right term life riders, it helps to have a firm understanding of how your coverage will work in general. Start with our FAQ on term life insurance for a run down of need-to-know information on this topic.
- If you have a solid understanding of term life insurance, and a handle on the right life insurance riders for you, head over to our review of the best term life insurance companies to start comparing potential providers.