What Is a Future Purchase Option?
A future purchase option (also known as a future increase rider) is a feature of long-term disability insurance (LDI) and some life insurance policies that allows policyholders to increase their insurance coverage periodically, or as their income increases. These increases are effected without new medical underwriting, known as guaranteed insurability.
This guarantee is granted in exchange for paying a higher premium over the life of the policy.
- A future purchase option allows insurance policyholders to increase their coverage without medical underwriting at some point in the future.
- It is a way of keeping benefits on pace with inflation, based on increases in a policyholder's income, where premiums for the future purchase option will increase with age.
- Future purchase options are different from insurance inflation protection riders, which allow policyholders to increase coverage periodically over the course of their policy term.
Understanding Future Purchase Option
The future purchase option is typically valid until the policyholder reaches a specified age. Owning a future purchase option means that even if a policyholder develops a serious health condition that would make it expensive or impossible to qualify for a new policy, they can nevertheless purchase additional coverage under their existing policy because the future purchase option does not require the policyholder to pass a new medical exam.
A future purchase option is also often available with long-term care (LTC) insurance, which is designed to cover extended nursing care costs, such as a long stay in a nursing home. The cost to purchase extra insurance through the future purchase option depends on the policyholder’s age. Also, the insurance company decides how much extra coverage to issue based on the policy’s original coverage amount and the economy’s inflation rate.
The additional cost for a future purchase option rider is often relatively low, making up approximately 2 percent of the total policy cost. However, premiums for future purchase options increase with age as they are calculated based on the age at which the option is renewed. Policyholders can increase their benefits periodically, say every two to three years. This arrangement is ideal for policyholders who have passed a certain age, say 60 or 70, and are at greater risk of being hospitalized and can actually afford the high premiums required to enroll in such options.
Future Purchase Option vs. Inflation Protection
A future purchase option is not the only way a policyholder can increase their coverage over time; another option is an inflation protection rider, which serves a similar purpose. In fact, many brokers will recommend inflation protection for younger customers because it increases the value of a policy's benefits over time, keeping pace with inflation, so if and when they ever need care, benefits will still cover the increased cost.
Note that inflation protection is usually offered to policyholders even if their income does not increase, while some future purchase options will be contingent on proving a higher income.
Future Purchase Options and Younger Policyholders
The future purchase option may have favorable pricing but only lets the policyholder increase coverage near the beginning of the policy term, whereas an inflation protection rider will cost more but continually increase the policyholder’s coverage over the course of the term. In addition, if a policyholder declines to take advantage of the future purchase option when the insurance company offers it, it might not be offered again.
Note that practices vary among insurance companies. Purchasing inflation protection can be more expensive, but may provide better coverage in the long run. If the policyholder can afford the additional cost, purchasing some type of protection against inflation is usually a good idea, especially in the case of a long-term care policy, since health-care costs have been rising significantly faster than the cost of living.