Depending on which agent you talk to, insurance riders are either fundamentally important or a waste of money. I say it depends on which type of policy you’re talking about. For sophisticated products like universal life, a long term care rider can alleviate the need for a separate long term care policy. Some riders are both cheap and critically important, like the “waiver of premium for disability” rider. As the name implies, your premiums are paid by the insurance company if you become disabled. Some term life policies have riders that provide living benefits for severe illness, and those are good as well.
Perhaps the most controversial use of riders is with small whole life policies. The most common riders on these polices are accidental death and grandchild riders. Accidental death is a relatively rare occurrence, and dishonest agents can use certain language to suggest that they are doubling or tripling the amount of coverage with this rider, conflating the death benefit with the rider benefit. Grandchild riders provide a small amount of convertible term insurance for grandchildren. The problem with this rider is that almost nobody converts the term insurance into a permanent policy. You would be much better off buying a “limited pay whole life” policy for your grandchildren. Be weary of agents trying to push these two riders because they might be using them to justify an overpriced policy.
Life happens, and people either forget to make payments or they can’t make a payment. With life insurance there are some protections in place if that happens. Every life insurance policy has a 30 day grace period to catch up on a missed payment. If death occurs during a grace period, the missing payment is deducted from the death benefit. If payment isn’t made within the grace period then a statement of good health must be provided to the insurance company in order to reinstate the policy. Fortunately, most policies require automatic payment from a checking account or credit card if the policy owner opts to make monthly payments. Autopay greatly reduces the number of missed payments. Insurance companies will allow payments to be mailed in if they are on a quarterly, semi-annual, or annual basis. Very few companies allow mailed payments on a monthly basis.
Additional protections are available for whole life that aren’t available for term life. Whole life uses the plan’s cash value to extend coverage if premium payments stop. A loan can be taken against the cash value in order to make premium payments, or a nonforfeiture option can be invoked. I will discuss nonforfeiture options in a later post.
I sometimes hear people tell me they would rather wait to buy whole life insurance because if they purchased it now their premium payments would exceed the death benefit. Is that scenario possible? Sure, but its impossible to predict because many people pass away much sooner than expected. There are better ways to minimize that problem that don’t involve postponing coverage. A type of policy called “limited pay whole life” has a set number of years that premium payments are made. After those years are done, the life insurance policy is paid in full and the coverage stays in force forever. A 20 pay whole life policy has 20 years of payments, whereas a life pay whole life policy can have 50 or more years of payments. The insurance company makes more profit on 50 years of payments than 20 years of payments. If you have a life pay whole life policy, you can stop premium payments and still keep coverage in force with a “reduced paid up” option. With this option you accept a lesser amount of coverage that is paid up.
Buying life insurance over the phone has become more prevalent in recent years. There are pros and cons to buying over the phone. One obvious disadvantage of phone sales is the lack of nonverbal communication. Its debatable how much you can trust someone without any nonverbal cues. Another disadvantage to phone sales is the lack of options. There are options with phone sales, but there are more options meeting an agent in person. Many life insurance companies are accepting phone sales, but many still insist on doing business in person. You could be missing out on a better deal if you do business over the phone. The advantage of buying over the phone is the convenience. Who wants to clean house and act hospitable for a stranger selling insurance? You might even have to offer the agent something to drink. With in-person sales you have to carve out a date and time on your calendar for an agent that might not be punctual. I personally believe the convenience of phone sales is overrated. Buying life insurance is a lifelong commitment. You might want to look at the person that’s sticking you with a lifelong commitment. I also believe in-person sales create a more robust dialogue and better information for the client.
Purchasing the right amount of coverage has always been a source of anxiety for potential buyers of life insurance. Not buying enough coverage isn’t the end of the world. You can buy a separate policy to make up the deficit. The new policy will be subject to underwriting, so if your health deteriorated since the last policy, you might have to pay more. The new policy will be rated on your current age, so if you’ve had a birthday since your last policy, the rates are likely to be higher because of it. Also, almost every policy has an annual policy fee built into the monthly premium. If you have multiple policies, you will likely pay multiple policy fees. Policy fees for small whole life policies will run about $40 for the year.