Understanding Life Insurance – What Are Living And Death Benefit Riders?

All new life insurance policies offer different riders on their policies. These riders are simply additional payables to you in case some tragic accident or mishap leaves you out of work or in a situation that could be financially detrimental to your well being. This post will explain the various riders and your choice of selecting a living benefit life insurance.

Two Categories of Insurance Riders

Riders are offered within variable insurance contracts and policies as either living benefit riders or death benefit riders.

What are Living Benefit Riders?

The purpose of living benefit riders, in general, is to set a legal guarantee of paying a defined amount to the insured (or his/her annuitant) while they are still alive and in need of financial support.

What are Death Benefit Riders

Death benefit riders are meant to protect the insured's policy against declines in contract values. This makes the policy immune to variations in the market and hence makes it's original payable value consistent throughout its life.

Different Forms of Riders

Both living and death benefit riders come in various specific forms. Each rider is an additional purchase by policy holder and hence receive an annual charge on a regular basis (monthly, quarterly, and so on). Hence, the specific type of each rider you have purchased will affect your policy differently.

How Different Forms of Living and Death Benefit Riders affect your Policy

In case of living benefits, the riders can guarantee your principal amount, or fix a certain rate of hypothetical growth (backed by certain terms and conditions), etc. Death benefit riders, on the other hand, can offer protection by guaranteeing the initial amount of principal invested, (hence reserving the right of subtracting any withdrawals made), offer lump sum death benefits equal to highest recorded value of in the contract.

How these specific forms of riders work can better be understood through examples:

Example #1:

Impact of a Basic Living Benefit Rider

Imagine that you have purchased a $100,000 variable annuity contract that includes a basic living benefit rider protecting your initial investment. Just assume that your investment in the subaccounts mentioned in the contract performed poorly, leaving you with assets actually worth $69,000 at the time you want to liquidate it. The rider will let you walk away with the original $100,000.

Impact of a Basic Death Benefit Rider

Imagine Helen has purchased a $200,000 contract at age 50 with a basic rider protecting the original principal. Helen lived to a ripe age of 70, and the contract grew but for 15 years only, and was decimated by a strong shift in the market. As a result, the contract is valued at $173,000. The rider will step in and dictate that her beneficiary receives the original $200,000 that was invested in the contract!

Example #2:

Impact of an Enhanced Living Benefit Rider

Imagine a Andrew decides to invest $150,000 in a variable annuity with an enhanced rider that guarantees him a 6% growth rate. The amount has been invested in various subaccounts mentioned in the contract.

Assuming that after 25 years, Andrew decides to annuitize the contract and commit it to pay him a guaranteed stream of income, then the enhanced rider allows the income stream to come from approximately $643,000 (equal to $150,000 growing at 6% per year for 25 years) instead of the $400,000 (the actual contract value!)

Impact of an Enhanced Death Benefit Rider

Imagine that Nick invested $200,000 in a contract at age 50 and passes away at aged 60. The proceeds were allocated in various aggressive subaccounts that soared the value of the principal to $350,000, but then declined to $295,000. The rider makes sure that Nick's beneficiary will receive $350,000 i.e. the highest recorded value in the history of the contract!

Other Available Riders

Yes, there is more to riders than the four examples quoted above!

Many riders are available that provide specific types of protection against other circumstances that could severely affect the growth of the contract.

The catch with these riders is that they reduce the value of the contract each year. Take the example of a rider that charges a fee of 1% of the contract value. Given that this fee will be assessed on an annual basis (regardless of how the contract has been performing), and if the value of the contract declines to $99,000, then the rider will further deduct $990 from the contract's value.

As a result, living and death benefit riders are beneficial when you are guaranteeing a contract value higher than what it stands at the beginning. This can be overcome by spending some time understanding the contract with your insurance expert.

Wrapping it Up

Riders are available in most of the variable annuity contracts and can offer a diverse range of protection for both contract owners and beneficiaries. But, the guarantees offered by them come at a cost that must be carefully weighed in order to be justified.

Stay tuned for more informative articles!

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