What is a Term Rider?

It’s common to think of a life insurance policy as having three basic parts – the death benefit, a premium, and in the case of whole life insurance, a cash value accumulation feature.

But those are just the foundations. Nearly any life insurance policy can be customized by using one or more of a variety of life insurance riders.

These are optional provisions that add extra benefits and even additional coverage to your basic policy.

One of the most common types of life insurance riders is a term rider. And not only is it common, but it’s also one of the most valuable.

It can offer you the opportunity to get a higher level of life insurance coverage but at a greatly reduced premium.

What is Term Rider?

A term life insurance rider usually starts with a base policy that’s whole life, or some other form of permanent life insurance.

Since whole life is permanent coverage with a fixed monthly premium and a cash value accumulation provision, it’s much more expensive than term life insurance. In fact, whole life can be anywhere between 10 and 15 times the premium of a comparable amount of term insurance.

That creates an obvious problem in that you can only afford so much coverage under a whole life policy.

While you may want to enjoy the benefit of both permanent coverage and a regular cash value accumulation, the size of the death benefit will be limited by the amount of the premium.

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How A Term Life Insurance Rider Works

But term riders have been created by the insurance industry to work around the cost problem associated with permanent life insurance. The best way to explain how a term rider works is through an example.

Let’s say you want a whole life insurance policy because it offers permanent coverage. But because of the high premium, you can only afford a $150,000 policy. Based on your family profile and financial situation, you know you need at least $500,000 in coverage, but you simply can’t afford a whole life policy of that size.

Your insurance broker adds a term rider in the amount of $350,000 to get you to the $500,000 coverage amount you need. The rider is for a 20-year term policy since that’s the space of time in which you have the greatest need for extra insurance coverage. By the time the term rider expires, your children will be grown and gone, and the $150,000 whole life policy will be sufficient.

And because term life is so much less expensive than whole life, the cost of the $350,000 term rider increases your total premium only slightly, and is still within your budget.

In the most basic way, adding a term rider to a whole life insurance policy effectively creates a hybrid policy. You’ll have a base of permanent insurance, with an added layer of additional coverage for the time in your life when you’ll need it most.

Advantages of Adding a Term Rider to Your Policy

Cost Savings

The most obvious advantage is cost. A $150,000 whole life policy may have an annual premium of $1,500. But the cost of a $500,000 whole life policy might approach $4,000 per year.

If instead you take the $150,000 whole life policy at $1,500, and add a $350,000 term rider, at $350, your total annual premium will be $1,850. That’s less than half the $4,000 premium cost of a $500,000 whole life policy.

Flexibility

Next to being under-insured, the biggest problem people have with life insurance is being over-insured. While that may seem like an odd thing to read on a life insurance blog, it’s the kind of situation we see often and work hard to fix.

But it’s true, you can be over-insured. That’s largely the result of the fluctuating need for life insurance. For example, early in life, you may have young children and significant financial obligations that require a large amount of life insurance coverage. But 20 years later, when your children are grown and your financial obligations have declined, you probably won’t need as much life insurance coverage. In addition, many people become at least partially self-insured as a result of building up a large base of financial assets.

Having permanent life insurance that reflects the high need early in life will see you paying too much for premiums after those additional financial obligations are gone. Using a combination of a whole life base policy and a term rider will give you the flexibility to have the additional term coverage in place during the time of greatest need in your life, then either reducing or eliminating the rider when it’s no longer needed.

The Ability to Purchase Coverage When You’re Younger and Premiums are Lower

A typical conundrum for young families when it comes to life insurance is that the greatest need for coverage usually coincides with the greatest financial limitations. After all, early in life, you’re on the lower rungs of the income ladder and haven’t had the years needed to accumulate a large base of savings and investments.

For that reason, many young families may delay purchasing an adequate amount of life insurance until later in life when their financial situation improves. The problem with this strategy is that life insurance becomes more expensive as you get older. This is especially true in the case of whole life insurance, particularly when you need a large amount of coverage.

Buying a whole life insurance policy for a relatively low amount and supplementing the coverage with a larger term rider will allow you to lock in lower premiums while you’re younger. Meanwhile, if you decide you need still more coverage in 10 or 15 years, you may be able to increase the amount of your term rider to make up the difference.

You Have a Large Temporary Need for Additional Life Insurance Coverage

We’ve already discussed the need for additional life insurance coverage when you have a young family. But that’s not the only situation that might present a temporary need for a larger death benefit.

Debt is another prime example. You may decide to add a term rider to your policy to cover a large mortgage on your home or even a large student loan balance. For example, if you have 25 years remaining on a 30-year mortgage, you may want to add a 25-year term rider to your whole life policy to pay off your mortgage if you should die before making the last payment. Your whole life proceeds would then be available to provide for your family’s remaining living expenses.

Similarly, if you have 15 years remaining on a large private student loan (which may not be automatically canceled as a result of your death, the way federal student loans are) you can add a 15-year term rider to your policy to pay off that loan if you die before it’s finished.

Disadvantages of Adding a Term Rider to Your Policy

The major disadvantage with a term rider is that it is temporary coverage, as is the case with all types of term life insurance. If your base policy is whole life, you obviously have a desire for permanent insurance. The term rider is designed to expire at some point.

If you add a 20-year term rider to your whole life policy, then discover near the end of the term that you will need the coverage to continue, you’ll need to renew the rider.

Some term riders come with an automatic renewal provision, though it may offer renewal in increments of one or five years. You won’t need to requalify for the renewed coverage based on your health condition.

But because you will be older at the end of the 20-year term, your renewal premiums will be higher because they’re based on your age. That will continue to be a factor for as long as you want to keep the term rider in place.

If your term rider does not include guaranteed renewability, you may be required to qualify for a new policy entirely. Not only will that be more expensive – again, because of your age – but if you develop any health conditions since taking the original policy, your premiums will be higher still.

And under extreme circumstances, your health condition may leave you unqualified for a new policy.

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Term Rider FAQs

Can a Term Rider be Removed without Disturbing Your Base Policy?

The answer to this question will depend on the specific provisions of the term rider. Most insurance companies will allow for these riders to be terminated early, and without disturbing your base whole life insurance policy.

But even if they do, be very careful. Should you decide removing the coverage was a mistake after the fact, you may not be able to restore it.

Though that option may exist within the first year of cancellation, it may require you to

1. requalify based on your health, and/or
2. that you pay the premiums going back to the date you terminated the rider.

But if more than one year passes from the time you removed the rider, you may not be able to reinstate the rider at all, short of full requalification.

How do I Add a Term Rider to My New or Existing Life Insurance Policy?

The best time to add a term rider to a whole life insurance policy is at the time of the original purchase. Not only is this the easiest way to add the rider, but it can also result in a lower premium.

The insurance company may include the rider cost in the overall premium, providing the coverage at a reduced rate. Other times, it may be added as an entirely separate policy, at a slightly higher cost.

Some insurance companies will allow you to add a term rider after the fact, but there may be a time limit or certain intervals while your whole life insurance policy is in force. And some companies don’t allow it to be added later at all.

Is a Term Life Insurance Rider Best For You?

If you even think you might need a term rider for additional coverage, it’s something you need to discuss with your insurance broker at the time you apply for the whole life coverage.

As life insurance brokers, we work with many different insurance companies, and we know the ones that offer the most flexible and affordable terms for term riders.

That’s why you’re better off working with us than applying directly with a single company. A single company will only be able to offer you the term riders and other policy provisions they have available. But as brokers, we can place your application with the life insurance companies offering the riders that best match your needs and preferences.

We’ll do all the legwork for you, and it won’t cost you anything extra for our services. You’ll pay the same premium if we place your policy as you will if you obtain it directly from a life insurance company.

That will not only save you the time it will take to find the right policy on your own but also money since we will work to get you the most cost-effective policy available.

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