How Does the Guaranteed Insurability Rider Work?

The guaranteed insurability riders, also known as the future purchase option, future increase option, guaranteed purchase option, or guaranteed increase option rider, allows the insured of a life or disability insurance policy to purchase additional coverage without going through a new medical exam.

This rider can help an insured purchase additional amounts of insurance when he/she suffers an illness. It can also speed up the process of buying more coverage because the insured can skip the step of providing evidence of insurability to the insurance company.

Guaranteed Insurability on Life Insurance Policies

The insured adds the guaranteed insurability rider to a life insurance policy when originally buying the policy. The rider will allow the policyholder to choose the amount he/she will be able to purchase through the rider. The insurance company will limit the choice of the policy owner.

For example, the life insurance company may limit the purchase amount to $150,000 at each option date. This means the policyholder is free to choose any amount up to this $150,000 maximum.

Life insurers commonly have minimums for this rider as well. Minimums for the rider tend to be around $10,000 to $25,000 per exercise date.

The rider is commonly available on permanent life insurance policies. This means you can expect to find it as an option when buying either whole life insurance policies or universal life insurance. It is far less common to find this rider available on a term life insurance policy. There are some companies that offer a guaranteed purchase option rider on term insurance, but the coverage purchased through the rider is permanent insurance and not an additional term policy.

The rider amount is usually tied to the face amount of the policy. The life insurance company will normally limit the increase amount to the policy's death benefit. So if you purchased a $100,000 whole life policy, the maximum guaranteed increase rider amount will be $100,000.

It's worth noting that the rider does not increase the face amount of the original policy. Instead, it creates a new policy in the amount of the exercised amount of the rider. For example, if you own a $100,000 whole life policy and you choose to exercise the guaranteed purchase rider for $20,000. You'll now have your original policy and an additional permanent policy of $20,000. If using the rider on a dividend-paying whole life policy, the additional coverage purchased through the rider will also be eligible for dividends.

Coordinating Death Benefit Riders to Increase Coverage

Some insurance companies will coordinate the waiver of premium rider with guaranteed insurability rider.  So if you qualify to have the waiver of premium rider pay your premiums, this might also qualify you to have the guaranteed insurability rider to increase your death benefit coverage and also have the waiver of premium rider cover those new premiums as well.

Option Dates

The guaranteed insurability rider works by allowing the insured of the policy to purchase additional coverage up to the amount chosen at specific option dates. The insurance company specifies these dates when issuing the policy. Common option dates are every 5 years up to a specific age such as 55 or 60 years old. Once the insured reaches this age, he/she can no longer purchase additional coverage through the rider.

The insured can exercise his/her right to purchase additional coverage at each option date if he/she wishes. This means the insured can purchase a substantial amount of life insurance through this rider without providing proof of insurability.

Accelerating Option Dates with Life Events

Many guaranteed insurability riders allow the insurance to accelerate option dates if the insured has a qualifying life event. These events include:

  • Birth of a child or adoption of a child
  • Buying a new home
  • Getting married
  • Getting a raise or finishing a program of study that moves the insured into a career with a higher income

Not all guaranteed insurability riders will provide the feature to accelerate an option date for the same set of reasons. This means some of the events listed above will allow the insured to purchase more coverage ahead of schedule, but some of them may not be on a specific insurance company's list of reasons to use the purchase sooner than a regular option date.

Buying Additional Life Insurance without the Rider

Policyholders who opt not to purchase this rider can buy additional life insurance coverage. They will need to provide evidence of insurability by undergoing a new medical exam each time they wish to buy more coverage.

If the insured is still healthy when choosing to buy more coverage, and they are in-between option dates, skipping the rider will permit a coverage increase without a waiting period until the next option date.

Disability Insurance Policies

You can also find the guaranteed insurability rider on disability insurance policies. On disability policies, the rider also allows the insured to increase coverage without a new medical exam to provide proof of insurability.

One key difference between the guaranteed purchase option riders on disability policies and life insurance policies is the number of times the insured can exercise an increase option. As we covered above, life insurance policies usually offer several dates to exercise the option and the insured can purchase additional coverage multiple times. With disability insurance policies, the guaranteed increase option rider only permits one increase or will only permit increases up to a selected maximum amount over a certain period of time.

For example, let's say you purchased a disability insurance policy with a $1,200 monthly benefit and a guaranteed purchase rider in the amount of $2,500. You could exercise the rider and purchase an additional $2,500 in monthly benefit. If you do, the rider terminates and you will not have the option to purchase another $2,500 at some future date.

Alternatively, you may have the option to increase coverage in smaller amounts up to the maximum amount of the rider. Instead of purchasing the entire $2,500, let's say you increased your coverage by $500. You would then have $2,000 remaining on the rider and could continue to purchase additional insurance until you reach a total of $2,500 of additional insurance purchased.

With both life and disability insurance, the guaranteed increase rider guarantees the insured the ability to buy additional insurance regardless of his/her health status when exercising the option. The rider does not, however, allow the insured to ignore financial underwriting when purchasing additional coverage. This means that the insured must still provide evidence of insurability from a financial perspective.

For example, let's say own $1,200 in monthly benefit coverage under a disability policy with the same $2,500 guaranteed increase option rider. Your current income would normally allow you to buy up to $3,000 in monthly coverage per the insurance companies underwriting guidelines. You will only be able to exercise $1,800 of the rider.

Also, note that unlike life insurance policies the increase amount under the rider is less loosely connected to the base policy benefit amount.

Cost of the Rider

The cost of the guaranteed increase rider comes as an additional premium the policy owner pays for the benefit. The amount of the additional coverage the insured can buy, the number of option dates, and/or the length of time the insured can exercise the option all affect the amount of the premium.

Because there is so much variability to these factors, it's difficult to provide an exact amount you can expect to pay to have this benefit. All insurance quotes that include this benefit will, however, provide a detailed breakdown of the premium you pay and where the money goes. This will allow you to evaluate how much the rider costs you.

Additionally, the rider expense goes away when the rider terminates. This can happy for two reasons. First, it will occur once the insured reached the termination age for the rider. All guaranteed purchase option riders have a termination age–this is the last possible date the insured can exercise the option. This is normally between ages 50 or 60. Once the insured reaches this age, the rider is no longer available for use and the expense of it goes away.

Second, the rider cost goes away if the insured exercises all of the increase option made available by the rider.  So if the insured used all of the increase option dates on a life insurance policy, or increased his/her coverage to the maximum allowable on his/her disability insurance policy, the cost for the rider goes away.

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