We often tend to think of a term life insurance policy as being “pure life insurance” – which basically is what it is. As such we might see it as kind of the no-frills policy where there are no extras that can be added to it. That can even be a primary reason why we might choose to go with a whole life insurance policy, rather than term, under the mistaken assumption that provisions can only be added to whole life.
While it is true that term generally tends to be a simpler type of life insurance, there are some add-ons – typically referred to as “riders” – that allow you to add extra provisions to your policy.
Here are a few of the more common ones:
Convertibility clause
A convertibility clause gives you the right to convert your term life insurance over to permanent life insurance without having to have a medical examination. Since term life covers relatively short periods (5 to 30 years), should you decide near the end of the initial term that you’ll need the coverage for a longer period of time, the convertibility clause will allow you to convert from term life to whole life (permanent).
This provision is valuable to have, but it will also result in a higher premium for your term life insurance policy. Since the conversion from term to whole life will involve a certain amount of risk to the insurance company, they will charge a higher premium for the privilege.
Return of premium option
One of the inherent disadvantages of having a term life insurance policy is that at the end of the term your policy will expire and you will have no cash value as you would with a whole life policy. For this reason, insurance companies sometimes offer a return of premium option.
Under this provision, the life insurance company will refund the premiums you paid during the term that your life insurance was in force. The downside of the option is that your annual premiums will be considerably higher – as much as 30 to 35%. Since the premiums will be returned at the end of the term, the insurance company will use the higher premium as a way to earn some money on the policy written.
Accidental Death
An accidental death rider will enable you to double the amount of your death benefit in the event that your death is the result of an accident. For this reason, accidental death is often referred to as “double indemnity”.
This type of provision will also require a higher premium, and generally will limit the double indemnity provision to certain listed accidents.
Premium waiver
This is one of the most valuable life insurance options you can have. In the event you become disabled and are unable to work, this provision will allow you to waive your life insurance premiums for up to six months.
This will provide you with valuable time to rearrange your finances following disability. This will be important because it often takes months following a disability to activate disability income provisions. The premium waiver will buy you time that you’ll be able keep your life insurance in force.
Guaranteed insurability
This provision will allow you to purchase additional life insurance in the future without regard to the condition of your health. It essentially waives health as a requirement for insurability, and you will be able to obtain additional coverage without needing to qualify for the coverage.
As you can see, there are a number of options that you can add to a term life insurance policy, even though it isn’t considered permanent insurance. Each of these options will of course increase the cost of your term life insurance policy, but each also offers a significant benefit that will help to overcome many of the uncertainties of life.
