Most all life insurance contracts come with the ability to add a waiver of premium rider. This rider waives premiums due in the event the insured becomes unable to work due to sickness or injury. The application and usefulness of this rider varies among contracts, companies, and personal strategies, so today we’ll spend some time detailing some of the rider’s nuances.
What it Does
The general design/idea behind most waiver of premium riders is to swing into action much like a traditional disability policy. Once the stated elimination period has expired–typically 6 months by in some cases as short as 4–the premium that would normally be due is now waived providing the insured is no longer able to work due to injury or illness.
Premiums continue to be waived until the insured makes a full recovery or–if the disability event happens late enough in the insured’s life–until the rider’s expiry date (this one varies a bit, so contract specific language should be consulted).
The rider can be used/designed to cover base required premiums (or expenses if we’re talking about universal life insurance) or additional funding that is going into the policy (i.e. paid-up additions on a whole life policy or additional premium on a universal life policy).
For term policies, waiver riders are available to guarantee conversion to permanent life policies that continue to have premiums waived, if the insured should become sick or injured while he or she has a term policy.
You won’t often see waiver of premium quoted on term policies, because the rider is generally regarded as expensive (it often adds and additional 25% to the stated premium) and in truth term premiums are cheap enough to typically be covered even if the insured suffers an injury or illness that prevents him or her from working. Still, sometimes the benefits of having the benefits (i.e. conversion to a permanent product to ensure against losing coverage longer term) is one that should get at least some consideration.
Refund of Premiums
As is the case with most disability policies, premiums paid during the elimination period are refunded once the elimination period has been satisfied. An example will better ensure understanding.
If Joe has a life policy and has become disabled, he’ll pay premiums through the elimination period (let’s say it’s the standard 6 months). Once he has satisfied the elimination period, the insurance company will refund the 6 months of premiums paid, and he’ll no longer owe premiums unless or until he recovers from the disability.
Own-occupation and Any-occupation
Just like individual disability insurance, life insurance waiver of premium riders can vary in terms of own-occ and any-occ coverage.
Most waiver of premium riders will include an own-occ definition for a set number of years and switch to any-occ after that period. In fact, I’m not aware of any waiver of premium rider available that does not convert to any-occ after some set of years (longest I’m aware of at the moment is 6 years own-occ switching to any-occ after that).
The price for waiver of premium will vary a bit from company to company. Typically, the variance in cost wouldn’t be enough to move you in one direction or another when selecting between companies. The one exception to this would be term insurance. If you’ve chosen to add waiver to term policy, a more cheaply priced waiver of premium rider may help swing one company into the winner circle over others. Just be careful in evaluating the precise benefits in these scenarios as some companies boast low cost waiver riders that are cheap because they don’t cover a whole lot.
When gender specific pricing is available to the insurer (in most states, Montana being the most prominent exception) the rider is more expensive for females than males remaining in line with morbidity experience and expectations.
The Self Completing Strategy
If you’ve followed any whole life diehards, you’ll likely stumble upon a reference to life insurance as a retirement plan as a self completing strategy. This is a reference to the waiver of premium rider.
However, some companies and agents have advocated this while choosing to sell products that may not remain true to the idea. As discussed above some companies will not waive paid-up additions and/or additional premiums. So, if you are entertaining life insurance as an asset class/retirement idea and you’re relying on the waiver of premium to assist you in paying premiums if you cannot, it’s best to be very diligent in fact checking the waiver of premium provisions on the contract you’re targeting.