When buying a life insurance policy does it make sense to also pay for a rider that waives the premium payment if you become disabled?  According to the American Council of Life Insurers the majority of individual life insurance policies in force include a rider that waives the premium upon total disability. However, most people really don’t understand how the riders work or if it is a cost effective benefit.

What is a Waiver of Premium?

When you buy a life insurance policy, for an additional fee, a rider can be added to the contract that waives the premium payment if the insured becomes totally disabled.  In other words, the insurer pays the planned premium. For a term policy this would simply be the cost of insurance. But in a permanent policy the insurer would also be making additions that help build the cash value.

The cost of the rider depends on several factors including the amount of insurance and kind of policy as well as the insured’s age, occupation and health rating.  With term policies the cost of the rider could be an additional 10-15% of the planned premium.  The cost in a permanent policy varies depending on the design and kind of coverage (whole life, universal life, etc.). The rider commonly adds an additional 3-6% to the premium. (For more, see: Understanding Different Types of Life Insurance.)

How Does the Rider Work?

The waiver of premium rider is underwritten separately when applying for life insurance and is usually issued to individuals between the ages of 18 and 60. However, the rider is not automatically issued and for individuals in higher risk occupations, such as a fireman or police, an insurer may offer the life insurance coverage with a favorable rating, but exclude the rider. Or the cost of the rider could be more expensive based on the insured’s occupation or risky hobby, such as rock climbing.

Once eligible, the rider pays a benefit to age 65 or for the planned premium period. The planned premium period is how the policy was issued based on the hypothetical illustration. For example, the benefit could stop on a whole life policy that was scheduled to be paid up at age 55 or after 20 years on a level term policy. The limited waiver period can be a problem with a permanent policy that was illustrated with premium payments that extend beyond age 65 because the policy may be underfunded and eventually lapse. (For more, see: Understanding Insurance Premiums.)

To qualify for benefits most riders have an elimination period of four to six months during which the insured must be totally disabled. The premium may also have to be paid during the elimination period, depending on the company later reimbursed. If the insured has a recurring disability, due to the same problem, once the initial elimination period has been met subsequent claims will not require a new elimination period. However, if the claim is for a new ailment a new elimination period will be imposed.

What Qualifies as Disabled?

The definition of disability is included in the policy.  For example, many insurers define total disability as the inability to perform the substantial and material duties of one’s regular occupation. In addition, the disability must be due to an accidental injury or a sickness and pre-existing conditions may be excluded. The loss of sight as well as the loss of use of a hand or foot may also qualify the insured for benefits.

Definitions are very important and do vary by insurer. For instance, a liberal definition may allow the insured who was not working, but instead a full time student, when the disability occurred to collect benefits. Also, many riders allow the insurer to review the insured’s status periodically as well as change the definition of disability after a stated period of time, three to five years, for example. The change is usually to a broader definition of disability, such as the inability to perform the substantial and material duties of any occupation for which the insured is reasonably suited based on education, training or experience. Thus upon review the insurer could argue that benefits should end well before age 65, depending on the insured’s ailment. (For more, see: The 7 Reasons to Own Life Insurance in an Irrevocable Trust.)

Should You Buy a Rider? 

Purchasing a rider to waive the premium can be an expensive way to get a limited amount of disability income coverage. If you have group long-term disability coverage and/or are eligible to purchase an individual policy you should weigh the cost and benefit of the rider. If you have limited disability coverage or coverage is unavailable due to a health issue or could be very costly based on your occupation, then purchasing a rider that waives the premium could make sense.

The Bottom Line

Before automatically buying a rider you need to read the fine print and understand the how the rider works and what kind of benefit you could receive. Paying the added cost for the rider can make sense if you need the life insurance to stay in force and would have difficulties making the premium payments if you were out of work. (For more, see: Using Life Insurance to Help Provide for Someone With a Special Need.)