Life insurance options
When you purchase your life insurance there are a variety of options available to you. These life insurance options are known as ‘riders’ and serve a wide variety of purposes. Like buying a new car, adding these bells and whistles can add substantially to your costs without necessarily giving you a better ride. Let’s review the various riders, and decide if they’re worth the extra money or not.
Accidental Death rider (AD)
This rider allows you to purchase an additional amount of coverage that will pay out subject to accidental death. By contrast, it will not provide additional benefits should you die due to medical reasons. Accidental death provides coverage at a very low cost. But here’s the question we need to answer – do you need more coverage if you die as the result of an accident instead of due to medical reasons? I can’t imagine a case where how we die impacts how much coverage we should purchase. If you need more life insurance, purchase it as a regular policy. If you don’t need more coverage, then save your money. In either case, an accidental death rider is an option you should pass on.
Disability Waiver of Premium (WP)
This is an interesting and unique rider. If you purchase this rider and become disabled for longer than 6 months, the rider will kick in and pay your life insurance premiums for the balance of your disability. Certainly covering your bills upon disability is a great idea – as Forrest Gump said, that’s one less thing to worry about. But let’s pause for a second and consider what happens if you become disabled. Your insurance premiums are now paid, but who’s paying the mortgage? And groceries? And your heating bills? The answer is nobody unless you have proper disability protection. A proper disability plan should cover a substantial portion of your full income and not just your life insurance premiums. Effectively you want a new paycheque should you become disabled. That replacement paycheque should be enough to cover all your bills, including your life insurance premiums. In other words, if you have proper disability protection then you don’t need a disability waiver of premium rider on your life insurance policy. So make sure you have proper disability coverage (that’s extremely important!) and then take a pass on this rider.
Children’s Protection Rider (CPR)
This rider covers all of your children until they are adults. Typically the premiums are small, in the range of $5/month for $10,000 of coverage. As the coverage lasts until they are adults and then is assumed to lapse, this is basically term insurance for your children. While deciding if you should cover young children with life insurance is beyond the scope of this article, if you do decide to purchase insurance on your children until they’re adults, this is an extremely low-cost way of accomplishing that goal. In short, if you want insurance on your children while they’re at home, consider a Children’s Protection Rider.
Guaranteed Insurability Option (GIO)
This rider guarantees that you have the option of purchasing additional insurance in the future, without a medical exam. Should you take advantage of the option, you will have to pay the additional insurance premiums – the cost of the rider doesn’t cover future insurance costs, only the option to purchase more insurance. This is an option rarely used by individuals and is much more commonly used by businesses that are growing. It provides the ability for a business to manage risk by guaranteeing future insurance purchases. You can generally ignore this option if you are purchasing life insurance for personal reasons. Consider the option if you are purchasing life insurance for business reasons, to guarantee that you can purchase insurance in future years, but compare it to the cost of just purchasing the full amount of the additional insurance today.
Second insured rider
If you have a base policy, it can be noticeably less expensive ($60-$70/year) to add a second person to your life insurance policy. This is because life insurance premiums consist of a monthly administration fee and an insurance cost. When adding a second person as a rider, the monthly administration fee is either discounted or waived, leaving just the basic insurance costs. This is a particularly effective way to add insurance for younger female nonsmokers, as their actual underlying cost of insurance is negligible.
Rather than taking out additional coverage as a separate policy, a term life insurance rider allows you to top up your coverage for a period of time. Just like a second insured rider, adding additional term rider coverage on your life can save you the monthly administration fee when compared to a separate policy thus providing some savings. Consider doing this if you need additional term coverage for a period of time.
Which life insurance options make sense for you?
That covers most of the common rider options available on Canadian life insurance policies today. When purchasing a life insurance policy I recommend ensuring you have proper basic coverage first and foremost and then examine the additional riders and options individually and separately.
If you have a great disability income policy, it doesn’t mean you should forego the waiver of premium rider. The rider is just another way to leverage your dollars should you become disabled. With as many as 2/3 of people being disabled for a short or long-term period before 65, it could still be very valuable. A disability income policy doesn’t usually cover your entire income amount, but just a portion.
Great article. I remember reading somewhere that the actual claim rate on Accidental Death Riders is that around 3% of riders ever pay out.
One other consideration I see a lot of for the guaranteed insurability rider is on kids policies. Usually, they are initially smaller policies with very limited underwriting. I’ve seen way too many cases of young people in their 20’s and 30’s now looking for more substantial insurance getting declined for health reasons. A lot can happen in those early years and for the cost it adds to the policy it is often worth it to protect your kids future insurability.