Adding riders and supplemental benefits to whole life products can help you customize a policy to fit your specific client's needs. Because riders -- additional sets of terms and conditions not included in the original policy -- usually provide a benefit to the policyowner, an insurance company often charges an extra premium for them. While some riders are designed to increase the death benefit of the policy, others increase the policy's living benefits.
Although exact descriptions, along with full conditions and exclusions, for riders vary from company to company, some of the most popular offerings are generally described as follows:
- Accelerated Death Benefit: Makes it possible to receive a part of the death benefit prior to the death of the insured if a physician has certified terminal illness.
- Accidental Death Benefit: Provides payment of an additional benefit amount if the insured dies as a result of an accidental bodily injury.
- Children's Insurance: Covers all children named in the application under a certain age.
- Waiver of Premium: In the event a policyowner becomes disabled, the policyowner will no longer be required to make premium payments after a specified length of time has passed.
- Term: Provides a fixed amount of term insurance that is added to the whole life policy for a specified amount of time. This rider, when used with a whole life insurance policy, can cost-effectively increase the death benefit of a whole life policy because it combines the benefits of whole life insurance -- including the cash value it builds -- with the low cost of term insurance.
- Guaranteed Purchase Option: Does not require evidence of insurability to purchase additional life insurance at specified times during life.
- LTC Acceleration: Generally enables the policyowner to use all, some or none of a policy's death benefit to pay for long-term care.
While all of these riders can be useful when used with the appropriate clients, perhaps one of the most versatile and most popular riders in recent years is the Paid-Up Additional Insurance rider, often known simply as PUA. When it is added to a basic, whole life insurance policy, it can offer an easy way to increase the living benefits of the policy because it often increases the amount of guaranteed cash value as well as ultimately increases the guaranteed death benefits.
A PUA rider may offer your clients:
- Additional protection for beneficiaries
- Additional cash value, which can be used for policy loans or partial surrenders
- Tax-deferred values if the policy is not a Modified Endowment Contract (MEC)
- The flexibility to add the rider at time of issue or at a later date
- The flexibility to use it for deferred compensation, college funding, mortgage protection and acceleration, wealth transfer and as a supplement to retirement income
- When purchased from a mutual life insurance company, possible dividends (although never guaranteed) are usually paid on the amount of insurance in force at the end of the policy year. Thus, dividends from the rider are added to dividends from the policy.
To help clarify how a PUA rider can benefit policyowners, here are two hypothetical illustrations. One shows a base whole life policy over 25 years; the other shows the same policy with a PUA rider over the same time frame. You may be surprised what adding this rider can do for your clients.
Sample Case: Sam is a 45-year-old male, preferred non-tobacco, who wants to buy whole life insurance to protect his family. He can afford to pay a total annual premium of $10,000. With a stay-at-home spouse and one child preparing to enter college, he is interested in learning more about the living benefits of whole life insurance. Here's a comparison of what he can expect if he purchases a base whole life insurance policy versus the same base policy with an annual PUA rider.
As you can see from these illustrations, guaranteed net cash value grows more quickly when a PUA rider is added. With the PUA rider, by the third year, the guaranteed net cash value in the policy has increased enough that Sam can access it through a loan to help pay for his daughter's college tuition. By the fifth year, the guaranteed net cash value increases to more than four times the annual premium. By the 10th year, total net cash value exceeds total premium paid on the policy that has the PUA, but it doesn't on the base policy.
By age 65, the net cash value on the policy with the PUA rider is $50,000 more than on the base policy (as long as prior loans are repaid). At this time, Sam can borrow again from the policy's cash value to supplement his retirement.
Although the guaranteed death benefit is initially generally smaller when a PUA rider is added to a policy, by year 25, it exceeds the guaranteed death benefit of the base policy. Thus, especially for younger clients who want to make use of the living benefits of whole life insurance throughout their lives and still provide for their beneficiaries after their death, a PUA rider can be an extremely useful addition to a whole life policy.
Selling whole life's living benefits
Although most of your clients may understand the death benefits of life insurance, many may not be aware of the living benefits whole life insurance provides. Chief among these is that when the cash value in a whole life policy reaches sufficient levels, policyowners can often access this money through loans and withdrawals of dividends, often without incurring current taxation.
While you're talking to your clients about riders, don't forget to remind them about all the guarantees a whole life insurance policy provides, which may include level premiums guaranteed to never increase for the life of the contract; a guaranteed death benefit paid (less any outstanding loans) to the named beneficiary, income tax free; a policy that is guaranteed not to lapse as long as the required premium is paid; and guaranteed cash values (and in some cases, non-guaranteed dividends) that can be accessed through loans and withdrawals throughout a policyowner's life.
In addition, most whole life policies include a non-forfeiture of benefits clause that enables policyowners to continue their insurance plan as extended term insurance or reduced paid-up insurance if they decide to stop paying premiums.
It's clear that whole life insurance offers policyowners key benefits, but put one or more riders on the policy -- especially a PUA rider -- and you may have not only customized the policy, but also maximized its living benefits. That can create a win, win, win situation for a policyowner.
Elizabeth Cicchetti, M.B.A., ACS, FLMI, is senior marketing communications specialist at Mutual Trust Financial Group in Oak Brook, Ill. (www.mutualtrust.com). MTL Insurance Company, established in 1904 and the flagship of the group, is known as "The Whole Life Company" because of its leadership in participating whole life insurance. This article is for producer use only.