If you knew that you were guaranteed to be eligible for life insurance, would you buy coverage? If you currently have life insurance, do you wish you had more coverage? One of the biggest reasons people don’t have adequate insurance is because their health prevents them from qualifying for life insurance, or requires high policy premiums for sufficient coverage. A guaranteed insurability rider can prevent that from happening.
What are Insurance Policy Riders?
By definition, “insurance” is a contract or policy that provides financial protection against loss. Whether it’s loss of property, a job, health, even a particular skill or unique characteristic (Betty Grable’s legs, Bruce Springsteen’s voice, etc.) or your life, insurance provides compensation for loss. And one factor that plays a pivotal role in the selection and purchase of insurance is the one you cannot prevent or control: change.
Change happens. Things change. Some are predictable, like the aging process; some are not, like illness or accidents. So in the insurance business, there is a feature known as an “insurance policy rider.” An insurance “rider” is any addition to your basic insurance policy that allows you to add-on benefits that were not included in your original policy.
Policy riders provide a variety of coverage benefits and allow you to customize your insurance policy to fit your exact needs. Many of them are available for little to no extra cost.
The Guaranteed Insurability Rider
One of the most popular life insurance riders, the guaranteed insurability rider, also referred to as a guaranteed purchase option, guarantees that you can renew or increase your amount of coverage at a later date without a new medical exam or other proof of insurability.
In this article, we’ll explain:
- How a guaranteed insurability rider works
- Why guaranteed insurability riders are so popular
- The insurance rider cost and how it’s calculated
- Who benefits most from a guaranteed insurability rider
- How to get a guaranteed insurability rider
- When your insurance rider ends
How a Guaranteed Insurability Rider Works
When you choose a guaranteed insurability rider with a whole life insurance policy, you are given the option to periodically increase your coverage. For example you might be able to add-on at age 30, 35 and 40 or every three years between 25 and 40. Usually, there is an age where the opportunity will end, which depends on your insurance carrier. You also have the option to increase your coverage after a major life event, like buying a house, getting married, having a baby, or adopting a child.
With a guaranteed insurability rider option, there are minimum and maximum amounts of coverage you qualify for. These amounts vary based on your insurance company and your eligibility. Typically, you cannot exceed the amount of your original policy in total options. For example, if your original policy was created with a $100,000 death benefit, you could exercise your option and add another $100,000 of coverage all at once, or you could increase your coverage by $10,000 each option period for 10 periods. You’re not required to exercise your option; it’s simply there if you need more coverage.
As previously mentioned, most insurance companies give you the option to increase your coverage with this rider every 3 to 5 years. It typically occurs around the anniversary date of your policy. Depending on your insurance carrier, you have between 30 and 90 days to decide if you want to increase your insurance coverage. To exercise your option, you submit a form (a Paradigm Life wealth strategist can help with this) to your insurance company along with the additional policy premium payment. If you decide not to exercise your option in a given period, no action is required. Should you have a major life event, like a marriage or birth, that option usually takes precedence over a policy anniversary—you likely won’t be able to increase your coverage for both in the same year.
What Makes a Guaranteed Insurability Rider so Valuable?
Even if you remain in good health as you get older, simple things like weight gain can affect your life insurance coverage. Locking in the lowest and best policy premium now can save you tens of thousands of dollars in whole life insurance premiums over your lifetime.
When you apply for a whole life insurance policy, your insurance company assigns you to a rate class. The rate classes offered are: preferred best, preferred, standard plus, standard, and substandard. These rate classes influence your insurance policy premium, your coverage, and the insurance policy riders you are eligible for. Whichever rate class you are assigned is the rate at which your increased insurance will be billed when you exercise your guaranteed insurability rider. For this reason, locking in a great rate now saves you thousands in insurance premiums later. It’s worth mentioning that a substandard rating will typically render you ineligible for a guaranteed insurability rider.
Your insurance needs will change over the course of your life. As your family grows, you’ll likely want a larger legacy for your beneficiaries in the form of an insurance death benefit. If you start your own business, or your current business grows, so will the need for more insurance coverage. And major life purchases like a home or paying for college for your kids can add to your family’s liabilities. Having extra insurance in place to cover these large costs, should something happen to you, is invaluable to your family and their financial security.
How Much Does This Rider Cost?
The cost of a guaranteed insurability rider is minimal compared to the increase of coverage you can get years down the road. Your cost will be dependent upon the amount of your insurance policy, your age, and your insurance carrier. You can usually expect to pay an additional $100-$200/year.
For even more security, you can consider pairing a guaranteed insurability rider with a waiver of premium for disability rider. With both riders, you can increase your coverage regardless of future health issues and ensure your policy premiums are covered should you become disabled and unable to make payments. You would essentially be insured for life at no cost with the option to continue increasing your coverage within the specified term of your guaranteed insurability rider.
Who Needs a Guaranteed Insurability Rider?
A guaranteed insurability rider might be the right choice for you if you think you may need more insurance coverage in the future but are concerned that new health problems may prevent you from getting coverage. If you’re young and healthy, it can help you lock in a great rate and enjoy the coverage you and your family (or future family) need.
The guaranteed insurability rider is a must-consider insurance product if you have a history of medical issues in your family or are in a high-risk group for a specific disease, particularly illnesses like cancer, diabetes, and heart disease, which are often hereditary and tend to show up in your later years. It is also a very worthwhile rider to have in case of an accident or any life-changing event that would, otherwise, affect your ability to increase your existing coverage.
Health issues aside, a guaranteed insurability rider is a great addition to an insurance policy if you’re planning on getting married, having kids, buying property or want to better utilize the benefits of a whole life insurance policy, including increased tax advantages, cash value, and policy loans. Chances are your income will be higher in the future than it is now; a guaranteed insurability rider allows you to purchase the amount of whole life insurance coverage you can currently afford now and add more coverage as your future income allows.
The guaranteed insurability rider for children
Children are typically the least expensive to insure. What if you could lock in their rate into adulthood? When you add a guaranteed insurability rider onto a child’s whole life insurance policy, you give them to gift of being able to increase their coverage as they get older, when they need it most: graduating college, buying their own home, and starting families of their own.
How to Get a Guaranteed Insurability Rider
When you apply for a new whole life insurance policy, you can also request riders at the time of application. While different insurance companies have their own particular guidelines and regulations, it is most commonly utilized by people between the ages of 25 and 40. A few insurers will approve a guaranteed insurability rider for policyholders up to 55 years old, with the option to increase coverage ending at age 60.
The guaranteed insurability rider is not available for term life insurance policyholders. If you’re considering term life insurance but think you may want more coverage down the road, or permanent coverage with the option to earn guaranteed interest and potential dividends, convertible term insurance is a great way to go.
When Does This Rider End?
Your guaranteed insurability rider will terminate at the end of your last option period. For example, if your last option is at age 40 and you have a 60-day option period, your rider will terminate at the end of said period, regardless of whether you use your option or not. Once your rider has terminated, you will no longer pay for it.
Examples:
Example 1
Ashtyn, age 30, purchased an insurance policy with a guaranteed insurability rider. It provides her the option to increase her insurance every 3 years. At age 31, Ashtyn is diagnosed with skin cancer. Luckily, it was caught early enough that she fully recovers, but she would typically face much higher premiums should she want more insurance coverage.
Because Ashtyn has a guaranteed insurability rider, when her option occurs at age 33, she is eligible to increase the death benefit of her insurance without additional medical exams. She is guaranteed to qualify for additional insurance at the rate stated with her original policy.
Example 2
Brad has 2 children, Micheal and Morgan, under the age of 18. He purchases whole life insurance policies for both of them with guaranteed insurability riders. When his oldest, Michael, gets married and starts a family of his own, he decides he needs more coverage. Micheal is able to increase his coverage when his first child is born, regardless of when his next option occurs, because the birth of a child is a qualifying life event.
Brad’s other child, Morgan, gets diagnosed with Type 1 diabetes in high school. Once she reaches adulthood, she doesn’t have to worry about being denied insurance coverage. She is able to increase her coverage when her next option arises. Her insurance company allows her to add more insurance every 5 years until age 40, at which point her guaranteed insurability rider will terminate.
Example 3
Edgar, age 35, purchases a whole life insurance policy with both a guaranteed insurability rider and a waiver of premium for disability rider. The next year he suffers a tragic accident that leaves him disabled and out of work. His insurance company continues to pay his policy premiums, thanks to his waiver of premium for disability rider, but Edgar is also able to exercise his options with his guaranteed insurability rider.
At his next option period, in this case at age 40, Edgar doubles the amount of insurance coverage he has to match his original policy amount. His insurance company covers the premiums of both the original policy and the additional insurance coverage because he has both riders in place.
Conclusion
Having the right insurance policy riders in place is an easy and cost-effective way to make sure you and your family have the coverage you need when you need it most. The annual cost of a guaranteed insurability rider may be a small price to pay for the peace of mind of qualifying for additional insurance no matter what happens with your health. Whether for you, or for your children, this popular rider is worth considering adding to your policy when you apply for whole life insurance.
When you talk to your Paradigm Life agent about your insurance needs, ask for more information or to include the guaranteed insurability rider in your free policy quote. If it’s ever needed, you’ll be very grateful that you did.
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