All insurance policies have options: home insurance, car insurance, umbrella policies, health, and commercial policies. Every one of them has options. Even life insurance has options available to anyone who’s interested. Most people are surprised to learn this, but I believe it’s important to cover each one when I discuss life insurance. There are 4 primary life options including:
- Accidental Death Benefit
- Waiver of Premium
- Return of Premium
- Child & Spouse Rider
Accidental Death Benefit: This option provides an increased benefit in the event the person with the life policy (the insured) dies from an accident. Accidents include events such as car accident, work related accident, a fall at home, etc. The qualifications for this benefit are:
- The cause of death is directly attributed to an accident
- Most carriers will stipulate that the death occurs within a certain time period after the accident (so many days, weeks, months, etc.)
The amount of the increased death benefit can be stated in one of two ways:
- As a fixed dollar amount such as $10,000 or $25,000
- Or it can be a percentage of the amount of coverage such as 5%, 10%, etc.
These will vary from company to company. One of the more popular uses of an accidental death benefit is to add this coverage to a car insurance policy. I don’t usually recommend it because for every 5.3 million accidents there are around 30,000 to 31,000 deaths resulting from a car accident.
Since this benefit is for a death caused by an accident, no additional payment is made if the insured dies from causes other than an accident such as an illness, etc. The likelihood of dying from an accident depends on many factors such as gender, type of work, hobbies, frequency of travel, what size city you live in and more. About 100,000 people die from accidental death each year making it the fifth leading cause of death. Men are twice as likely to die from an accidental death as women.
Waiver of Premium: “What happens if I become disabled and unable to work?” This is the question a single mom asked me recently in the process of our discussing a life insurance policy for her. Waiver of premium answered her question completely and helped her address a need for life insurance without compromising her financial situation should she become disabled.
This option covers payments for the insured if they become unable to work. The disability could either be long term or a permanent one and it covers the payments until the disability is over, the person dies or the end of the policy, whichever comes first.
I encourage anyone considering this option to think about building an emergency fund that covers at least 6 months of living expenses (mortgage, car payments, insurance, utilities, food, etc.). Hopefully it’s never needed, but if a person becomes disabled or suffers a job loss, an emergency fund could be a life saver, especially if there is outstanding debt.
Return of Premium: Let’s illustrate the differences between term and permanent insurance: term is like renting a home while permanent is like buying a home. But what if at the end of renting your home, all your rent was returned to you? That wouldn’t be so bad would it?
Return of premium does exactly that, it returns the premium at the end of the policy term should the insured not die. This provides a nice bonus for the person who’s purchased the term policy. Many insurance companies have stopped offering this option, but there are still a few of the larger ones that do.
The difference in cost between a term policy with this option and one without is typically between 10% and 20%.
Child and Spouse Riders: Life coverage can be added for an immediate member of the insured’s family with a rider (option). Historically a rider was added to an insured’s life policy to cover the stay-at-home spouse (dad or mom) without the expense of the added spouse having their own policy. This same option can be utilized to add a child or children to a parent’s policy.
I inform my clients of these options however I don’t recommend either one of them. My view is simply this:
- Each spouse or partner should have his or her own policy. This better protects the surviving spouse financially, whether the life benefit is replacing lost income or is used to cover added expenses of raising a child or children without the support of the stay-at-home parent (childcare, after school care, etc.).
- I’m also not crazy about policies on kids as most children in the United States make it to adulthood and there are better ways to invest your money for higher education, etc.
Having stated that, these options are relatively low cost options if the additional coverage is desired and the budget will handle the cost.
Before adding any of these options, I believe it’s imperative for anyone shopping for life insurance to answer the following two questions first.
- Which of these options provide a better level of coverage that is desired by the insured?
- Is the added protection affordable and worth the increased premium?
Only you can answer these questions, but knowing your options and what the cost impact is, means you’ll be a fully informed consumer. The cost to add each of these options varies. The range can be a few dollars more per month or year to add the accidental death benefit or it can be up to 20% more if the return of premium benefit is added. Knowing which option is right for you and how much it impacts your budget will help you decide if it’s worth it or not.
What do you think? Share your thoughts, comments or questions with me on my Google + or Facebook pages, or in the comments section of this blog. I’d love to hear from you.