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When you have a life insurance policy, you need to pay premiums to keep the coverage. If a disability keeps you from working, you may no longer be able to afford to pay the premiums and could lose your life insurance protection. However, a rider for a waiver of premium could help protect against this situation. But what is a waiver of premium rider exactly, and when might it make sense to add one to your policy?
A rider is an extra benefit that generally comes with an additional cost. With a waiver of premium rider, the insurance company waives the premium if you become disabled. In the event of a serious illness or injury that forces you out of the workforce, you can still keep your life insurance.
So long as you continue to meet the waiver of premium disability conditions, the life insurance company would keep your policy in force. Once you are no longer disabled and are able to work again, premiums or charges would no longer be waived, and it would be your responsibility to resume making premium payments to keep your policy in force.
When Does a Waiver of Premium Apply?
The terms for a waiver of premium are explained in your policy. It typically lists a minimum amount of time you need to be disabled before the waiver begins. Generally, you would need to pay your premiums during this waiting period, and if you're still disabled when that time period ends, the insurer would begin waiving your premiums.
A rider typically defines what qualifies as a disability. Some policies use certain language, such as:
- "Own occupation" - meaning you qualify if the disability prevents you from doing your current job
- "Total" or "any occupation" - meaning your disability is so severe that you cannot work any job
For example, if a surgeon injured their hand and could no longer perform surgery, they might qualify for "own occupation." However, they might not qualify for "any occupation" if the hand injury still allowed them to work an administrative job or give lectures as a medical school teacher.
What Are the Potential Benefits?
Roughly one in four employed 20-year-olds today will develop a disability before they retire, according to the Council for Disability Awareness. Adding a waiver of premium rider on your life insurance can help keep your coverage in this all too common situation.
If you have a policy with cash value, this rider can help to maintain your values. The rider could save you from having to dip into your cash value to pay your premiums.
When Does This Rider Make Sense?
The younger you are when you apply for coverage, the more useful this rider could be. The insurance company usually sets the price of this rider based on your age and health during the underwriting process.
A younger, healthier applicant often has a better chance of qualifying at a lower cost. If you want your coverage to last for many years, this rider could become useful one day in the event you become disabled and unable to pay your premiums.
On the other hand, the older the insured person's age is at issue, the higher the rider cost may be. As the rider becomes more expensive, you may want to weigh whether the extra protection is worth the higher price. You should also keep in mind that although the rider may cost more, the value of the benefit may increase because the premium is typically higher if the policy was issued at an older age. Insurance companies might set a maximum age at which you can buy this rider.
Finally, if you only need coverage for a short amount of time, this benefit may not be as useful due to its waiting period. Once the waiting period has passed, remaining time on a short duration term policy may not make the cost of the rider worth it.
What Else Should You Consider?
It is also important to understand that the waiver of premium feature is not a replacement for disability income insurance. A premium waiver benefit only covers your life insurance costs and will not pay you cash directly. If you are worried about losing your income due to disability, you may want to consider a stand-alone disability income policy as well.
As you weigh your options, consider meeting with a financial representative. They can help you go over your options and decide whether the waiver of premium rider makes sense for your life insurance policy.