Knowing how a guaranteed insurability rider works and who will be best served by such a rider can help you decide if you need to purchase one for your own life insurance needs.
What Is a Guaranteed Insurability Rider?
Life insurance is an important tool for financially protecting your family, as it pays out a death benefit when you die. But life insurance generally requires proof of insurability, since individuals with terminal illnesses or risky habits can cost insurers more in death benefits than they pay in premiums. Since the chance of illness increases with age, it’s more difficult for older individuals to qualify for higher death benefits. But a guaranteed insurability rider is a way to guarantee you can increase coverage as you age. With it, you can purchase additional life insurance at specified intervals, such as every three or five years, without a medical exam—no matter what your health situation is at the time. For instance, under normal circumstances, an individual diagnosed with a terminal illness would not be able to increase their life insurance death benefit. But if that individual had purchased a guaranteed insurability rider, they could increase their insurance amount despite the diagnosis.
Acronym: GI rider
How Does a Guaranteed Insurability Rider Work?
To buy a guaranteed insurability rider, you will likely have to purchase a permanent life insurance policy, such as whole life insurance. A permanent life insurance policy offers coverage for your entire life, as long as the premiums are paid. Since permanent life insurance is designed to last a lifetime, its premiums tend to be higher than those for term life insurance, which only promises to pay out a benefit if you die during the term. If your insurer offers a guaranteed insurability rider, you will likely have to pay an additional premium to add it to your policy. With the rider in place, the ability to increase your insurance coverage is limited to specified times, known as option periods. Some of these option periods are age-related; for example, you may be able to increase your insurance at ages 25, 30, and 35. The final age-related option period is often set around age 40, after which point you may no longer increase your death benefit without taking another medical exam. In addition to age-related intervals, you may also have the right to increase your death benefit within a certain time period (typically 90 days) of the following life-changing events:
MarriageBirth of a childAdoption of a child
You cannot use the guaranteed insurability rider to increase your benefit at any other time. Instead, you must wait for one of the option periods outlined in your policy. However, you are not required to increase your insurance benefit amount during any of the option periods. Your insurer will also specify how much additional benefit you can add to your policy with each option period, as well as a maximum total benefit associated with the rider, typically an amount equal to the original policy. For instance, if you purchase a $100,000 policy with a guaranteed insurability rider, you will likely be able to increase the benefit by a maximum of $100,000. After you exercise the guaranteed insurability rider to its full extent, your policy’s death benefit would be $200,000.
Do I Need a Guaranteed Insurability Rider?
This kind of rider can be a good idea for anyone younger than 40 who has reason to believe they will face health challenges in the future. If chronic illness or other health problems run in your family, purchasing a permanent life insurance policy with a guaranteed insurability rider can ensure you have the benefit you need while keeping your premiums low early on. However, guaranteed insurability riders have several downsides:
You will pay an additional premium on top of the insurance premium. Some people may find it is more efficient to simply purchase a higher-value life insurance policy from the beginning.The final option period is typically around age 40, meaning you will have to purchase a policy with this rider in your 20s or 30s.The cost of life insurance is relatively inexpensive for most people in their 20s and 30s, and it increases as you age. That means this rider will not help you avoid expensive age-related premium increases.Guaranteed insurability riders are generally exclusive to permanent life insurance policies, which are more expensive than term life insurance policies. Since you can only benefit from this rider if you purchase it at a young age, people who are appropriately aged for a policy with this rider may find the permanent insurance premiums are more expensive than they can afford.
Because of these downsides, people with no specific concerns about their future health may be less interested in adding a guaranteed insurability rider to their policy.
Alternatives to a Guaranteed Insurability Rider
If you anticipate needing more insurance in the future, other riders can provide similar benefits. These include:
Cost-of-living rider: To offset the effects of inflation, a cost-of-living rider will allow you to purchase additional insurance each year. The amount of insurance you can purchase is based on how much the cost-of-living index has increased. The rates for insurance purchased via this rider tend to be low, and you generally do not have to show proof of insurability (like a new medical exam).Term rider: With this rider, you can add term coverage on top of a permanent life insurance policy to cover your additional insurance needs for a short period of time.
