Editor’s Note: This is a guest post by Haven Life for Betterment’s Resource Center.
If you have family members or dependents who rely on you for financial support, then you’ve probably considered purchasing life insurance.
Life insurance policies pay a guaranteed amount of money (called a death benefit) to your dependents, offering a financial cushion when they need it most. This money can be used to help cover expenses such as your final expenses, mortgage payments, outstanding debts, college tuition, and more.
A life insurance policy can help look after those who depend financially on you. While the reason behind buying life insurance may be a grim one, it’s best to focus on the practical “what if” scenario in case you were no longer around, or able, to financially support your loved ones.
When shopping for life insurance, you’ll likely be presented with potential “add-ons” for your policy, called riders. In addition to riders, life insurers will also offer features inherent to the type of policy or contract under consideration.
Of course, not everyone needs all the riders and features available to them, and trying to choose from all the potentially costly options can make buying a life insurance policy unnecessarily complicated.
Understanding the benefits of each can help you secure a robust and personalized policy that can offer peace of mind in knowing that your family is properly protected.
Riders and Features
Life insurance riders are additional benefits that can be added to your policy so that the policy can better suit your individual needs.
Riders are typically available at additional cost, or may incur fees when exercised.
Features, on the other hand, don’t generally come at an added cost, but they can help you narrow down which policy and provider are best for you.
Here, we break down the three essential riders and features to consider, along with others that may be a great fit for your family’s specific needs.
1. Accelerated Death Benefit
An accelerated death benefit is typically a rider but can also be categorized as a feature inherent to a policy.
There isn’t usually a cost in your premium for this rider, but it can cost money to exercise the benefit, depending on the insurer.
Many life insurers offer an accelerated death benefit as a feature of their policy, and it’s a valuable one to have, primarily because it allows you to access death benefit funds if you are diagnosed with a terminal illness and a remaining life expectancy of generally 12 to 24 months.
This feature is useful if you’re terminally ill and want to get your affairs in order before you die. For example, you could arrange payments for medical bills or any upcoming expenses to help remove the financial burden on your family. The amount advanced, plus interest, is subtracted from the death benefit.
2. Guaranteed Renewability
You may also hear this feature referred to as a “post level term period.”
Guaranteed renewability ensures that no matter what, your life insurer must allow you to extend the length of your term. For example, if diagnosed with a terminal illness that would render you uninsurable, the life insurer must allow you to extend the policy term length without requiring that you take a medical exam. Guaranteed renewability is only available for a given period after the policy lapses, not for life.
Should you choose to extend the term length, your insurance premium will be more expensive than when you first got covered. But at least you’ll have the option to extend your existing policy instead of potentially being deemed uninsurable by another company.
3. Level Premium
Just like its name entails, a level premium ensures your policy premium remains the same for the specified period of your term length. However, a level term is not the only premium option out there.
Some term life insurance policies start with a lower premium and then increase as you get older. The risk you take is that at year 10, 15, or 20, you could end up with a monthly premium you can no longer afford. The cost increase of your premium could require you to terminate your coverage prematurely, or to purchase a new, level term policy when you’re older (and possibly less healthy), which could result in a higher monthly premium.
In most cases, it’s best to go with a level premium from the get-go.
Other Important Features and Riders to Consider
While we suggest that accelerated death benefit, guaranteed renewability, and level premium are important for most people, the following features and riders might also be suitable depending on your particular situation.
Waiver of Premium Rider, for Disability Concerns
A waiver of premium rider prevents your policy from lapsing should you become too sick or injured to work, and can’t afford your life insurance premium.
Consider this: One in five Americans lives with a disability. Bear in mind the definition of disability can vary by policy.
The maximum benefit period can also vary by insurer, from 12 months or up until the insured is 65 years old. If you are young and healthy, this rider is usually affordable, at less than a few dollars per month. Your individual risk tolerance will determine whether you purchase this rider.
Convertibility Rider, If Converting to a Whole Life Policy
The ability to convert your term life insurance policy to a permanent one can be a rider or a feature. If it’s a rider, it will typically cost more per month.
Convertibility works like this: During a specified time you have the policy (time periods vary by the insurer), you have the option to convert all or part of your life insurance death benefit into a permanent policy, without being required to take a medical exam.
This feature matters if you wish to own a permanent life insurance policy later in life.
Return of Premium for a Monetary Return
As its name implies, this rider returns some of the premium you’ve paid during your life insurance term, and is typically available only for 20- or 30-year policies.
If you do not die before the end of the policy, you are eligible to get your premium back plus interest. Some fees might be removed, depending on the insurer and policies.
An insurer offers this rider by charging a premium approximately 150% more per year than traditional term life insurance policies.
For some, this option is attractive because they like the idea of getting something back at the end of the term. For others, they prefer the lower premium of a traditional term policy and to keep more money in their pockets versus the insurers’.
Keep It Simple
Purchasing a life insurance policy doesn’t have to be complicated. Most people don’t need all the bells and whistles to have the best policy available for them, especially if it comes at an added cost.
That doesn’t mean, however, that you shouldn’t know and understand the valuable riders and features available so that you have the best policy to protect your family. After all, we purchase life insurance to take care of the ones we love.
Yaron Ben-Zvi is the co-founder and CEO of Haven Life, which provides a simple and affordable option for buying quality term life insurance online in 20 minutes. Learn more about Haven Life.
Betterment is not affiliated with Haven Life or the products they sell. This article is intended to be educational in nature and not to be relied upon as financial advice.