The waiver of premium rider is a mini disability insurance policy that covers the premiums due on your life insurance policy when you are sick or hurt and unable to work and therefore unable to pay the premiums due on your life insurance policy. This rider helps many Americans keep their much needed life insurance coverage during one of the most financially stressful and perilous times.
But you should know that this rider can vary considerably from one life insurance company to the next. It also varies considerably between types of life insurance (e.g. the rider often works differently for whole life insurance than than it does for term life insurance).
Waiver of Premium Rider: The Basics
Just like individual disability insurance, the waiver of premium rider specifies a definition of disability that the insured will use to qualify for benefits. Also just like individual disability insurance, the waiver of premium rider has an elimination period (i.e. a waiting period) where premiums are still due, but the insurer will refund the premiums paid during the elimination period. A few examples are in order to help explain all of this.
[thrive_text_block color=”blue” headline=”Definition of Disability: Own Occupation vs. Any Occupation”]Mary, a cardiac nurse, buys a whole life insurance policy and includes the waiver of premium rider on her policy. The rider specifies that is uses an own occupation definition of disability for the first two years of a disabling event changing to any occupation for a continuous disability after two years.
This means that Mary will meet the definition of disability and the rider will pay her premiums if she is sick or hurt and unable to work doing the specific nursing duties she presently performs regardless of her ability to perform other duties for gainful employment. After two years, however, the rider will only continue to pay the premiums on her policy if she is sick or hurt and unable to perform the duties of ANY job for which she is appropriately licensed, trained, or certified.[/thrive_text_block]
All waiver of premium riders have a changing definition of disability. This means all of them start out with an own occupation definition of disability and switch to any occupation after a few years of continuous disability.
[thrive_text_block color=”blue” headline=”Waiver of Premium Elimination Period”]Phil owns a term life insurance policy with a $75 per month premium. He becomes sick and no longer able to work at his current job. His term life insurance policy includes waiver of premium with a six month elimination period.
Phil must make six more monthly premiums before the rider will pay his premiums due on the term life insurance policy. Once six months go by and Phil pays those six premiums, the life insurance company will refund $450 to him. This is the six months of premiums paid at $75 per month during the elimination period. [/thrive_text_block]
Unlike individual disability insurance, life insurance policyholders don't often have the ability to choose the elimination period on a waiver of premium rider. Instead they most all come with a six month elimination period.
Once an insured triggers the waiver rider, it traditionally pays premiums during the entire payment period of the policy. For whole life insurance policies this is the original payment period until the policy becomes contractually paid-up. For term life insurance policies, this is generally the level premium period. For universal life insurance policies this period is often up to age 95 or 100 (depends on when policy expenses end) or some riders might specify an agent sooner that the payments terminate.
Conversion Options on Term Life Insurance
Several waiver of premium riders offer to convert term life insurance to permanent life insurance upon permanent disability of the insured. Under this contractual provision, the rider continues to pay the premiums due on the new permanent policy.
[thrive_text_block color=”blue” headline=”Waiver of Premium Conversion Example”]Susan owns a term life insurance policy with a $65/mo premium and a waiver of premium rider that converts her term life insurance to whole life insurance if she becomes permanently disabled.
Susan becomes permanently disabled and the rider converts her term life insurance totaling $500,000 in death benefit to a $500,000 whole life policy with an $8,000 per year premium. The waiver of premium rider pays the $8,000 per year premium for Susan.[/thrive_text_block]
You should know that this conversion option is not standard among term life insurance policies. You'll have to investigate such availability on the term life insurance policy you have or one you might consider for purchase.
It will absolutely be the case that waiver riders on term life insurance that do not convert to permanent life insurance like in the above example will be cheaper than ones that do provide this sort of benefit.
Waiver of Premium on Whole Life Insurance
The waiver of premium rider traditionally waives the entire base whole life premium and several rider costs attached to a whole life insurance policy, except in many cases the paid-up additions rider. Some whole life companies have a separate waiver rider for paid-up additions often called a “Specified Waiver.” This feature will pay the paid-up additions rider amount set at policy issue. Any increases to the paid-up additions rider after policy issue are not covered.
As mentioned already, the waiver of premium rider does cover the premium for whatever the original payment period of the whole life policy was. This means that if your insured under the policy becomes disabled, he/she does not need to use one of the methods available to whole life policy holders to stop making payments sooner than contractually guaranteed. Instead the insured can allow the rider to cover premium payments and not worry about surrendering cash value, using dividends, or making the policy reduce paid-up.
Waiver of Premium on Universal Life Insurance
The waiver rider can take a few different forms for universal life insurance. There is a lot of variation for universal life insurance, so you should approach this rider with care when looking at universal life insurance.
For some universal life insurance policy, the rider will be a waiver of monthly deductions. This means that the rider covers the expenses associated with the policy, but makes no additional payment to the cash value of the policy. The rider protects the death benefit, ensuring that expenses are always paid, but will make no increases to the policy's cash value through additional payments.
Other universal life insurance policies use a waiver of specified amount. This version of the rider provides for a specific amount paid to the policy when the insured qualifies as disabled under the rider. This amount is usually the original planned premium amount of the policy.
The waiver of specified amount will usually place money into the policy over and above the basic fees of the universal life insurance policy and therefore increase the policy's cash value. The intention of the rider is to continue to payment at the level of the insured paid all along. You should understand that this amount may or may not be high enough to cover expenses incurred in a given year for all years.
Termination of the Rider
If unused, the waiver of premium rider generally terminates sometime between the insured's age 60 and 65. The exact date depends on the insurance company. The insurance company will disclose the exact date in the policy contract.
Once the rider terminates, the premium paid for the rider also goes away. We'll use an example to ensure understanding:
[thrive_text_block color=”blue” headline=”Waiver of Premium Termination”]Ned owns a whole life insurance policy with a $1,200 monthly premium. $200 of this premium goes towards his waiver of premium rider. The rider terminates at Ned's age 65.
Ned turned 65 and his monthly premiums goes to $1,000 per month from $1,200 per month. The change occurs because the waiver rider terminated. Now that Ned no longer has this benefit on his policy, he no longer pays a premium for it. [/thrive_text_block]
Not Always Available Due to Underwriting
Life insurers underwrite the waiver of premium rider contemporaneously with the life insurance application. An approval for life insurance doesn't always automatically mean an approval for waiver of premium.
Should the applicant have a health history posing a concern for higher than normal probability of disability, the underwriter might specifically prohibit placing waiver of premium on the life insurance policy.
Additionally, the rider is often not available for applicants who receive offers for rated life insurance rates. The factors that suggest higher than normal probability of mortality often correlate with a higher than normal probability of morbidity (i.e. disability).