Understanding riders: Customizing your insurance policies and annuity contracts

Riders, also referred to as endorsements or amendments, are additional provisions that can be added to insurance policies or annuity contracts to alter the terms, conditions or scope of the original agreement. Common types of policies and contracts that support riders include life insurance, health insurance, disability insurance, long-term care insurance and fixed and variable annuities. Riders become incorporated into the policy or contract, require additional premium costs and are subject to approval by the insurer based on underwriting.

There are numerous riders available, each providing distinct benefits tailored to different financial needs and planning goals. When selecting riders, it is important to thoroughly evaluate your current coverage and identify potential gaps where a rider may mitigate risk. The most common types of riders include:

• Waiver of premium. They waive the obligation to pay policy or contract premiums if the insured becomes disabled. This maintains coverage without premium payments draining savings. They often are used for life, health and disability policies.


• Accelerated death benefit. They provide access to a portion of the death benefit while the insured is still living. This is payable if the insured is diagnosed with a terminal illness or requires lengthy medical care. The remaining death benefit passes to beneficiaries. They are primarily associated with life insurance policies.


• Long-term care. They pay a daily allowance for long-term custodial, nursing home or home health care expenses. Available for life insurance, annuities or health policies. They are useful due to limits to traditional health insurance coverage for extended care services.


• Return of premium. They return all or a portion of premiums paid if the policy is terminated before certain conditions are met. They are often used with term life insurance riders so policyholders can recoup premiums if death doesn't occur during the term.


• Cost-of-living. They increase the death benefit, cash value or annuity payments by a fixed percentage to offset inflation. This helps maintain purchasing power over the long term.


• Disability waiver. They waive disability insurance premiums during the benefit period when the insured is disabled and unable to work and earn an income. They prevent policies from lapsing due to an inability to pay.


• Accidental death. They provides additional death coverage if the insured dies from a covered accident. They often supplement base life insurance policies.


• Guaranteed insurability. Allows the option to increase the face amount of life insurance coverage at specified times without new underwriting. Helpful for growing families with changing needs.

Riders provide expanded utility and flexibility of insurance policies and annuity contracts. However, they also come with tradeoffs to consider.

Benefits of riders include:

• Customization for specialized needs that are otherwise unsupported by base policies.


• Option to modify coverage as needs change without replacing the policy.


• Potentially more cost-effective than standalone policies to address specific risks like long-term care.

Drawbacks include:

• Added premium costs that may outweigh the benefits gained. Need to assess value for money.


• Increased complexity that requires careful consideration about how riders achieve financial objectives.


• Scope limitations as many riders have capped payouts or restrictive qualifying criteria.

Not all riders may be beneficial or worth the additional costs. Carefully assess your risks, coverage gaps, financial goals and budget when deciding which riders align with your needs. There are several key factors to consider.

You need to consider your age, life stage, health and family medical history. Different riders cater to needs tied to youth, family growth, retirement, etc. Health factors also may influence the selection of critical illness or disability riders.

Keep finances in mind so you can optimize riders that are within your budget and still address key risks. If you have existing policies, you’ll need to make sure you avoid redundant riders that overlap existing coverage.

Your lifestyle also may play a role. For example, riders like those for an accidental death are suited for those with adventurous lifestyles.

To determine the most appropriate riders, meet with a financial professional to evaluate your circumstances holistically. The ideal rider complements base policies and contracts to create comprehensive coverage.

Benefits paid out through most riders are considered tax-free income to the policy or contract holder or beneficiary. However, accelerated death benefits may be partially taxable under current IRS guidelines.

Payouts are tax-free up to the limit of total periodic long-term care benefits. Beyond this threshold, payouts attributable to expected death benefits may be taxable as income. Any questions about the tax implications of a particular rider should be discussed with a financial professional.

Riders can be used strategically to help fund specific financial goals when structured properly. For example, long-term care riders create a pool of money to pay future assisted living or nursing home costs that may not be covered sufficiently by health insurance. This can offset expenses in retirement.

Accelerated death benefits can liquidate a portion of a permanent life insurance policy's death benefit to pay for experimental medical treatments or therapies for catastrophic illnesses that max out health insurance.

Return of premium riders on cash value life insurance policies allow policyholders to pay in premiums over a set period. If the insured doesn't pass away during that term, the premiums are returned, and that could help pay for major expenses like a child's college education.

Disability riders on mortgages or loans can make monthly payments if injury or illness prevents working and earning income temporarily or permanently. This prevents default or foreclosure.

Rider premiums are influenced by your health status and risk profile based on underwriting. Healthier individuals with low risk may qualify for lower premium costs for certain riders. Bundling multiple riders could also potentially lead to discounts. Maintaining good health and lifestyle habits may help reduce premiums over time.

When conferring with your financial professional or insurance agent, make sure to discuss options to negotiate rider costs when initially purchasing insurance policies or annuity contracts. Insurers may offer better rates on riders as part of an overall package to win your business. Make sure to evaluate offerings from multiple providers for comparison.

Carefully chosen riders can provide financial protection by covering risks, expenses and income gaps that may arise unexpectedly. Evaluating your unique situation helps determine which riders are most beneficial. Here are some real-life scenario examples of how insurance and annuity riders can provide value:

• Long-term care rider. Julie, 68, purchases a life insurance policy with a long-term care rider. Several years later she develops dementia and requires daily nursing care. The policy covers $150 per day for up to four years, helping pay the $6,000 monthly nursing home fees not covered by her regular health insurance.


• Return of premium rider. Andrew, 40, buys a 20-year term life policy with a return of premium rider. After the policy term, if Andrew is still alive, the rider will give back $50,000 in premiums paid that he can use to pay down his mortgage.


• Disability income rider. Mark, 35, adds a disability income rider to his home mortgage. If an accident leaves him unable to work, the rider will make his $2,000 monthly mortgage payments for up to two years while he recovers.


• Chronic illness rider. Julie, 61, utilizes an annuity's chronic illness rider that gives access to 50% of the annuity's value if she develops a qualifying chronic disease like ALS. This supplements her retirement savings and disability coverage.


• Accidental death rider. Patrick, 42, purchases a $200,000 life policy for his family with a $50,000 accidental death rider. If he dies in an accident, his family would receive the full $250,000 payout.


• Waiver of premium rider. Ashley, 28, adds a waiver of premium disability rider to her disability policy. If she becomes disabled and starts claiming benefits, she won't need to continue paying disability premiums.

Riders allow for customization and enhancement of standard insurance policies and annuity contracts to accommodate specialized needs. While all riders have advantages and disadvantages to weigh, they can provide valuable flexibility and financial protection when used strategically. With a thorough understanding of the riders available, you can make informed decisions to select appropriate options aligned with your coverage gaps, financial goals and budgetary constraints. The result is an insurance and financial safety net tailored specifically to your circumstances.