What is 'Dread Disease Rider'

A dread disease rider is a special addition to a life insurance policy that gives a percentage of the death benefit to the policy holder if he or she is diagnosed with a serious disease, such as cancer or heart disease.

BREAKING DOWN 'Dread Disease Rider'

A dread disease rider usually expires when the holder reaches age 65 and specifies which illnesses the policy will cover. Costs associated with critical diseases can be substantial enough to cause serious financial distress and even bankruptcy, thus necessitating dread disease rider insurance. Money from a dread disease rider is typically used to help offset the medical costs of the disease. The payout from the policy is usually made in a lump sum.

The policy may instead be structured to pay out regular income and the payout may also be on the policyholder undergoing a surgical procedure, for example, having a heart bypass operation. The policy may require the policyholder to survive a minimum number of days, known as the survival period, from when the illness was first diagnosed. The survival period used varies from company to company, however, 14 days is the most typical survival period used.  The contract terms contain specific rules that define when a diagnosis of a critical illness is considered valid. It may state that the diagnosis must be made by a physician who specializes in that illness or condition, or it may name specific tests that confirm the diagnosis.

In some markets, however, the definition of a claim for many of the diseases and conditions have become standardized to encourage all insurers to use the same claims definition. The standardization of the claims definitions may serve many purposes including increased clarity of coverage for policyholders and greater comparability of policies from different offices.

Examples of ‘Dread Disease Rider’

Types of ailments that might be covered under a dread disease rider include life-threatening forms of cancer, Alzheimer’s disease, Parkinson’s disease, heart disease, loss of limbs, organ transplants, and others. Due to the fact that the incidence of a condition may decrease over time and both the diagnosis and treatment may improve over time, the financial need to cover some illnesses deemed critical a decade ago are no longer deemed necessary today. Likewise, some of the conditions covered today may no longer be needed a decade or so in the future. The actual conditions covered depend on the market need for the coverage, competition among insurers, as well as the policyholder's perceived value of the benefits offered. For these reasons conditions such as diabetes and rheumatoid arthritis may become more commonly covered in the future.

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