Life Insurance Endorsements: How They Work for Optional Coverage
You’d think buying life insurance would be straightforward.
After all, that’s what life insurance quote websites want you to think.
Buying term life insurance or permanent life insurance can be straightforward if you want a plain vanilla policy.
However, you can make changes to these policies to help them better suit your needs.
These changes are called endorsements (also often called riders).
An easy comparison is buying a car. When you buy a car, you get a base model and can add options to it.
Riders are a car’s options package.
Here’s how life insurance endorsements work and the most common ones you may want to consider.
How Endorsements Generally Work
When you buy a life insurance policy, many people just buy the standard policy.
There’s nothing wrong with doing that.
Some people prefer to add slightly more custom options to their policy in the form of endorsements or riders.
Riders can help make the policy fit your family’s needs better and provide more financial security.
Additional coverage as part of a life insurance policy usually isn’t free.
Whenever you add extra benefits, expect to pay an additional cost. Each rider has its own cost.
Life insurance companies may price the same riders differently so it pays to shop around.
Adding and removing endorsements
Some riders can only be added to certain types of life insurance.
In general, a rider should be purchased when the policy is created.
You normally cannot add a rider after the fact unless you submit to another medical exam and go through underwriting again.
This helps the life insurance company make sure you’re still a reasonable risk before adding the rider.
Even so, it never hurts to ask if you can add a rider.
Certain companies may allow specific rider additions in some situations.
Thankfully, many insurance companies allow you to drop riders you no longer want.
You should expect to fill out a form authorizing this change to your policy to remove the rider.
1. Return of Premium
Return of premium riders are only an option for term life insurance.
These riders pay you back a percentage of or all of the premiums you paid for the policy.
This makes it sound like it makes the policy free, but that isn’t the case.
Term policies often last for decades.
Over those decades, inflation eats away at the value of a dollar.
You’re only repaid the actual dollar amount you paid, not an inflation-adjusted amount.
In reality, you get back less money in future dollars than you pay over time.
The rider adds a substantial cost to the policy, too.
2. Accelerated Death Benefit
This endorsement is sometimes called a living benefit rider.
It allows you to take money out of your policy before you die if you get diagnosed as terminally ill.
You’ll need documentation from a doctor to use this rider’s benefits.
Getting the money before you die can help you pay for any costs for treatment leading up to your death.
Alternatively, you can use the money to do something you’ve always wanted to but never had the money to do.
The downside is this rider lowers the death benefit paid to your beneficiaries.
3. Critical Illness Rider
This rider allows you to take money out of your death benefit before you die if you’re diagnosed with a chronic or critical illness.
Unlike the accelerated death benefit rider, it may not have to be terminal.
Common illnesses that may qualify include strokes, cancer, heart attacks, and more.
Check your policy to see which critical or chronic illnesses qualify for this rider before purchasing it.
Like with the accelerated death benefit rider, taking money out of your policy reduces the death benefit payout.
4. Waiver of Premium for Disability Rider
When people get disabled, they may be unable to work or earn as much money as they used to.
To help offset the financial stress if you get disabled, you can get this rider.
This rider waives your premiums if you become disabled according to the terms of the life insurance rider contract.
Make sure you understand exactly what qualifies as disabled before purchasing this rider.
If it is not comprehensive enough, you may not qualify for the waiver when you need it.
5. Accidental Death Benefit Rider
An accidental death benefit rider is a way to boost your death benefit if you die in an accident rather than from usual causes.
In general, you should be buying enough life insurance to cover your family’s needs, whether you die from an accident or something else.
For that reason, this rider is often seen as excessive.
People that work in risky jobs may feel the extra cost is worth the extra death benefit, though.
This is especially true if you can’t afford to buy as much life insurance as you’d ideally like.
Make sure you understand what activities are prohibited before purchasing this rider.
6. Guaranteed Insurability Rider
Permanent life insurance policies may allow you to add this rider type, but it isn’t usually an option with term life insurance policies.
A guaranteed insurability rider guarantees you’ll be able to increase your permanent life insurance death benefit in the future.
Normally, the rider gives you the option to add a specific death benefit at set points of time in the future.
If you don’t want to purchase more coverage, you don’t have to.
If you’ve been diagnosed with a deadly disease or feel you need more insurance, you can add what the rider guarantees.
7. Long-Term Care Rider
A long-term care rider isn’t a replacement for long-term care insurance, but it can help offset some of your costs.
Technically, it adds long-term care insurance to your life insurance policy. This sounds great, but it isn’t perfect.
In addition to being expensive, using this rider can lower your death benefit.
When you purchase life insurance, it’s often because your family will need the death benefit.
Having money to cover long-term care costs can be very useful if you couldn’t otherwise afford it.
Purchasing both a life insurance policy and a separate long-term care insurance policy would put your family in a better overall position.
8. Family Income Benefit Rider
A lump-sum death benefit payment from your policy is nice but isn’t always well-managed.
This rider adds a benefit paid out as monthly income to your beneficiaries.
This works well if you want your family to have a stable income source for a set period after you die.
9. Child Term Rider
A child term rider adds a death benefit for children if they die before the age specified in the policy.
The death benefit isn’t ordinarily large but should be enough to cover final expenses.
Your child may be able to convert this coverage to a whole life insurance policy once they reach the age where the term insurance stops.
In general, whole life insurance isn’t a great idea for young people, but it does have its place in rare circumstances.
10. Term Insurance Rider
Permanent life insurance policies may allow you to purchase a term life insurance rider.
This adds a term life insurance policy.
People may purchase this when they need more insurance in the near term than in the long term.
This can be useful while you have kids at home.
Once they leave your home, you may no longer need the higher coverage level.
Shop the rider’s price against purchasing a standalone term life insurance policy to see which is the better deal.
11. Term Conversion Rider
This rider can help if you decide you want to switch your term life insurance policy to a whole life insurance policy.
If you have this rider, you can convert your policy toward the end of the term.
Read the details of the rider to make sure you understand how it works.
Ideally, you won’t need a medical exam or have to go through underwriting again to make the conversion.
This can be useful if you develop a condition during your term life insurance policy that makes you uninsurable.
12. Cost of Living Rider
Inflation eats away at your money if it isn’t growing.
Life insurance policies typically pay out a flat amount whether you die today or 25 years in the future.
A cost of living rider increases the death benefit based on an index, such as the consumer price index.
This can help you make sure your life insurance coverage increases in value as inflation rises.
It can help prevent you from needing to purchase additional life insurance down the road.
Consult a Professional
Adding riders can get confusing fast. For help, you may want to consult an advisor.
Life insurance salespeople can inform you about riders. They likely will try to sell you riders, too.
After all, they get paid on commission.
Some salespeople are honest.
Others believe they are honest but have been influenced by their life insurance company.
In the end, the commission makes their advice hard to believe.
For this reason, you may want to consult a fee-only fiduciary financial planner.
These professionals get paid by you in the form of a flat or hourly fee. They don’t get paid commissions.
As a fiduciary, they have to give you the best advice for your situation, too.
Other advisors may only have to give suitable advice.
It’s up to you whether you consult a salesperson or a fee-only fiduciary financial advisor, but at least you know the pros and cons of each.