Riders are optional features that can be added onto a an insurance policy at a cost. We’ve talked about some common life insurance riders before. Here we want to address some common critical illness riders, and whether or not you should add them to your critical illness insurance policies.
Return of premium (ROP) on death
ROP on death is available as a rider for the policies of most insurance companies, and are even built into the policies of a few companies. The ROP on death rider allows for all premiums paid up to the date of death of the insured to be refunded to a beneficiary. The policy must be in effect when the insured dies and a CI benefit must not have been paid to receive this benefit.
The premium for this riders is a small percentage of the overall cost for younger individuals. For older insureds, since their mortality rate is greater, it costs more to add the rider to their policies.
For example, without the ROP on death rider, it costs a 25 year old non-smoking male $57.6/month for $100,000 of term-to-75 coverage. With the rider it only increases it by $2.16 to $59.76/month. But for an equivalent amount of coverage for a 55 year old non-smoking male, it costs $241.92/month without the rider and $261/month with the rider. The rider comprises only 3.6% of the premium for the 25 year old and 7.3% for the 55 year old (1).
The ROP on death rider is a low cost way for the owner to recover the premiums paid over the life of the policy should death occur before illness.
ROP on expiry (or maturity)
The ROP on expiry rider provides for a refund of premiums when the policy expires, which is age 75 for term-10, term-20 and term-to-75 policies. The policy must be in effect up to and including the year of expiry and a CI benefit must not have been paid to receive this benefit. A caveat to receiving the return of premium for term policies is that due to the high cost of premiums from age 65-75, you may have to cancel the policy before you have a chance to exercise the ROP on expiry.
ROP on expiry is slightly more expensive than ROP on death at younger ages, and much more expensive for older insureds. For example, without the ROP on expiry rider, it costs a 25 year old non-smoking male $26.01/month for $100,000 of term-10 coverage. With the rider it only increases it by $3.38 to $29.39/month. But for an equivalent amount of coverage for a 55 year old non-smoking male, it costs $153.81/month without the rider and $278.4/month with the rider. The rider comprises 11.5% of the premium for the 25 year old and a whopping 44.8% for the 55 year old (2).
ROP on cancellation (or surrender)
The last common return of premium rider, ROP on cancellation, grants the policy owner more flexibility than the previous two options. This rider allows the insured to cancel the policy for a refund of premium after a certain number of years. Once cancelled, coverage ceases and the insured will have to apply for a new policy for continuation of coverage. The premium refunded usually follow a scale, such that only a portion is refunded if the policy is surrendered when the option is first available, and increases to 100% if the insured waits longer to exercise the option.
For example, for BMO Insurance’s term-to-100 product, the ROP on cancellation is available starting in year 10 of the policy. Only 50% of the premiums paid to date is refundable at that point. However, the percentage of eligible premiums returned increases every year until it reaches 100% after 15 years.
ROP on cancellation is the most expensive out of all the ROP options, likely because of the added flexibility and relatively early access to premiums.
For example, without the ROP on cancellation rider, it costs a 25 year old non-smoking male $64.71/month for $100,000 of term-to-100 coverage. With the rider it only increases it by $15.3 to $80.01/month. But for an equivalent amount of coverage for a 55 year old non-smoking male, it costs $286.2/month without the rider and $561.15/month with the rider. The rider comprises 19.1% of the premium for the 25 year old and at 49% of the total cost for the 55 year old, it represents almost half the cost of the policy (3).
The ROP on cancellation rider, like the ROP on expiry rider, may make sense for a younger individual. But it is hard to justify the cost when it doubles the cost of the policy for an older insured. You’re likely better off putting the premium in a long-term investments that may give you a greater return.
Also, remember that with all ROP options, you either receive the ROP or the critical illness insurance benefit payout, but never both. If you do suffer a critical illness and have to make a claim, you just paid a higher premium than somebody who didn’t have the rider and got the exact same benefit.
Disability waiver of premium
If the insured should suffer a disability and satisfy a 3-6 month waiting period, he/she will not be required to pay the premium for the duration of the disability. The rider usually follows the ‘regular occupation’ definition of a disability for the first 2 years, after which the insured will have to satisfy the ‘any occupation’ definition.
If you already have an individual disability insurance, then your expenses including insurance premiums should be taken care of in case of disability, and this rider becomes redundant. However, if you don’t have a disability insurance policy, then you should consider this rider and its equivalent rider for life insurance.
These are just some of the more common riders available on critical illness insurance products. Different carriers have different interpretations regarding how they are applied and the features that are offered. Some are only available when first taking out the policy, while others may be added at a later time. Speak to a licensed insurance advisor if you would like more information about critical illness insurance riders.
1. Quote from Sun Life. Rates are current as of January, 2015.
2. Quote from SSQ Insurance. Rates are current as of January, 2015.
3. Quote from BMO Insurance. Rates are current as of January, 2015.
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