Logically, we purchase insurance to cover the unknowns that could significantly derail our financial plans. Emotionally, we may over insure to financially protect us from every peril. As a consumer, you need to approach insurance with a heightened level of scrutiny. The key is knowing relevant facts about your risks and developing a strategy to either mitigate them or insure against them.
Life insurance riders have a sketchy reputation. A rider is an added policy provision that enhances the coverage of the base policy for an additional charge. Riders are often seen as an up-sell — an extra charge for insurance that might be useful in a specific set of circumstances. If insurance riders are so superfluous, why do they exist?
Last week, I discussed hybrid life insurance and long-term care policies. Essentially, the long-term care provision is a rider that allows you to accelerate your death benefit to pay for long-term care expenses. In many circumstances, this is valuable and may be able to provide an affordable alternative to long-term care coverage. However, it should not be confused with a “chronic illness accelerated benefit,” which may be significantly limited in scope. Another favorable rider may be a “spousal” rider, which provides term insurance on the insured’s spouse. This may be useful in limited cases where the spouse does not qualify for a policy of their own.
By adding riders without considering your personal situation, you run the risk of over insuring. For example, a business owner who has a good own-occupation disability policy in place probably does not need to add a “waiver of premium” or “disability income” rider to their life insurance. It is important to take a step back and look at the cost-benefit of riders and see if you are already addressing a risk in another, more effective way.
Then there are the riders that come at no cost. These may include an “accelerated benefits” rider; an “automatic premium loan,” which taps the cash value to keep a policy from lapsing, or a “term conversion” rider, which allows you to convert your term insurance to permanent life insurance. Most life insurance policies consider these standard features rather than value-added benefits.
Riders may be attractive to some customers, but you need to understand the rider and the terms of what would be required for you to qualify for the benefits. You need to be careful not to get so caught up in the emotional aspect of protecting your family that you miss the value proposition of the insurance policy. You may be better off addressing a risk by finding a policy that covers a singular issue with your insurance adviser instead of adding riders to make one insurance product solve all your problems.
William G. Lako Jr., CFP, is an executive in residence at Kennesaw State University’s Coles College of Business and a principal at Henssler Financial. Lako is a certified financial planner.The Marietta Daily Journal will periodically publish columns from KSU business faculty.