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The guaranteed insurability option (GIO) allows a policy owner to purchase additional life insurance coverage at specified dates without providing evidence of insurability (i.e., no medical exam required). Insurers offer this option on a "use it or lose it" basis. The rider expires if the insured declines to exercise the option, so as to reduce the risk of adverse selection.
Since this rider specifies specific dates on which additional life insurance policies can be purchased, the policy owner can only make purchases using this option on those days or within a short window (generally 90 days). Typically, the older the insured gets, the fewer opportunities the policy owner has to purchase more life insurance. The rider may also allow the policy owner to purchase additional coverage at various milestones (e.g., marriage or the birth of a child). The birth of a child is often referred to as the stork provision.
The option amount is the maximum life insurance that a policy owner can buy on the specified date (option date). The policy owner can buy the option amount or less on the option date, or none at all. However, the option amounts cannot be added from one option to another if the earlier option date was not exercised. Premiums for new coverage purchased under this rider are calculated using the standard premium rates for the insured's attained age. The cost for the new coverage purchased under this rider is calculated on the basis of the insured's attained age.
Although the concept is the same from company to company, the official name may vary. Other names used to refer to the same type of rider include the guaranteed purchase option (GPO), the insurance protection rider (IPR), or the future increase option (FIO).
For example, Maria and Daniel purchase a $25,000 whole-life policy on their newborn son, Leo. For an extra $3 per month, they add the Guaranteed Insurability Option (GIO) rider. Leo's base coverage of $25,000 is issued when he is 21. The GIO rider gives Leo the contractual right to buy up to $25,000 of new permanent coverage (called an "option amount") at each future option date — no questions about health, hobbies, or occupation, and at the smoker/nonsmoker rate class he already has. Guaranteed option milestones written into the rider include Leo reaching age 24, 27, 30, 33, 36, and 39, and Leo can also substitute one of the age milestones for a life-event trigger, such as marriage, the birth or adoption of a child, or the purchase of a first home. By age 39, Leo has taken every remaining option, using 6 of the 8 available increases, to obtain $150,000 of whole life insurance coverage (plus the original $25,000 base coverage), a total allotment obtained without ever completing a medical exam — even though he developed type-1 diabetes at age 34. Availability windows are locked in at issue: Leo cannot "miss" an option and make it up later, and each option typically must be exercised within 30-60 days of the milestone date or event. Premiums for each new block are based only on Leo's attained age and rate class, never on new medical evidence, and the GIO rider ends automatically (usually at age 40 or once all options are used).
This rider automatically increases the face amount of the policy at specified intervals based on increases in the Consumer Price Index (CPI). Decreases in the CPI do not impact the face amount. The CPI measures the inflation rate each year.
For example, if there's a 2% rise in this index, the policy owner's face amount will increase by 2% for the next year. However, a decrease in the index will not result in the lowering of the policy's death benefit.
The cost-of-living (COL) rider or cost-of-living adjustment (COLA) rider can provide increases in the amount of insurance protection without requiring the insured to provide evidence of insurability. Of course, an increase in the death benefit will result in an increase in premiums. Additionally, a policy owner is not required to add the increased benefit; instead, they may simply request to keep the existing premium and benefit amounts.
These riders can take many different forms depending on the type of policy to which they are attached. With adjustable life policies, the COL is more of an agreement than a rider. The policy owner already has limited freedom to change the policy's face value amount. A COL agreement simply waives the need for the insured to prove insurability if the face amount increase is intended to match the increases in the CPI. With whole and term life insurance, a COL typically takes the form of an increasing term rider attached to the base policy. Since universal life insurance policies already have such a high degree of flexibility, the addition of a COL is not sensible.
Many people like the peace of mind that comes with permanent insurance policies and the large, inexpensive face values typically associated with term insurance. Term insurance riders were created to give insureds an inexpensive option to add additional temporary coverage to a permanent policy. These riders allow for an additional death benefit (above the permanent face value) if the insured dies during a specified term. Although there's an additional expense for the extra protection, it's nominal compared to the cost for the permanent protection and less than if the insured were to take out a separate term policy.
Additionally, if the insured is still alive at the end of the term, the rider will fall off the policy (i.e., the extra coverage terminates) and the cost associated with the rider will fall off of future premium costs. However, the premium and face value associated with the permanent protection for which the rider was attached will remain intact.
This additional insurance does not have any impact on cash values or dividends and is typically dropped if the insured exercises a non-forfeiture option or allows the policy to lapse. In addition to only being attached to a permanent policy (a term rider cannot be added to a term policy), the coverage period for a term rider cannot extend past the premium paying period for the permanent policy to which it's attached.
As with a standard term life insurance contract, term riders are a common way for an insured to have excess coverage during a specific phase of life (e.g., while raising children). There are many different term riders from which a policy owner may choose, most of which resemble the term life policies described earlier.
For example, John, a 35-year-old software engineer, is planning for his family's financial future. He decides to purchase a 20-pay whole life insurance policy with a face value of $200,000. John is aware that his family will have significant financial needs over the next decade, especially with his two young children, Emma and Liam, who will be starting college in the coming years. To ensure his family has additional financial protection during this critical period, John opts to add a $100,000 10-year term rider to his whole life policy. This rider provides an extra death benefit if John were to pass away within the next 10 years, giving his family a total of $300,000 in coverage ($200,000 from the whole life policy and $100,000 from the term rider). The cost of adding this term rider is minimal compared to taking out a separate term policy, making it an affordable way for John to temporarily increase his coverage. If John is still alive at the end of the 10-year term, the rider will expire, and the additional cost will no longer be included in his premium payments. However, the $200,000 face value of his whole life policy will remain intact.
A level term rider adds an additional fixed, level death benefit for a predetermined period at a predetermined cost to the existing face value of a permanent policy.
For example, an individual has been issued a $50,000 whole life insurance policy with a $100,000, 10-year term rider. If they die in five years (or at any point in the next 10 years), their beneficiary will receive $150,000 ($50,000 for the whole life + $100,000 for the term rider). If the individual dies in 15 years (or at any point after the 10-year term), their beneficiary will only receive the $50,000 face value of the whole life insurance.
A decreasing term rider adds a decreasing death benefit to the existing face value of a permanent policy for a predetermined period and at a predetermined cost. The cost of a decreasing term rider is lower than the cost of a level term rider because the benefit amount decreases each year. To discourage policy owners from canceling the rider later in the term (when the benefit is scheduled to decrease to a low amount), some insurers may design the premium schedule to end earlier than the protection period. Other insurers may design the benefit to only decrease for a portion of the protection period.
For example, Mary wants to add a 20-year decreasing term policy to her whole life insurance to cover the $100,000 balance of her mortgage. The insurance company may design the rider to start with a face value of $100,000 and decrease by $5,000 per year for a fixed additional premium of $20 per month, which is in addition to the premium for the permanent whole life policy. However, to discourage Mary from canceling the rider as the coverage decreases, the insurer may design the premiums so they're complete after 15 of the 20 years. Or the insurer may design the policy so that the face value stops decreasing after 15 years and remains at a fixed $25,000 for the final five years.
An increasing term rider allows for an increasing amount of coverage each year. Increasing term riders provide an additional term insurance face amount at death equal to either all premiums paid or the amount of cash value. Increasing term riders may also be referred to as increasing benefit riders and always increase the cost of the insurance policy.
The return of premium rider is a type of increasing term insurance added to a whole life policy. When the insured dies, the beneficiary receives the face amount plus an additional (term insurance) death benefit equal to the cumulative total of all premiums paid during the life of the policy. Therefore, under this rider, the amount of coverage increases each year based on the cumulative total of all premiums paid. The policy owner is simply purchasing term insurance that increases as the total amount of premiums paid increases.
Insurers may also offer a return of premium (ROP) term life insurance policy, which returns 100% of the premiums paid over the life of the policy to the policy owner if the insured is still alive at the end of the policy term. Any ROP is received tax free. Some policies may allow for premiums to be returned on a sliding scale if the ROP term life policy is surrendered. If the insured dies during the term, the beneficiary will receive the policy's face value only, without any premium return.
For example, at age 70, an insurer may return all premiums paid over the life of the policy to a living insured if the policy carries this rider.
The return of cash value rider is another type of increasing term rider that provides an increasing amount of term insurance equaling the cash value as it accumulates in a whole life policy. This rider allows the cash value to be paid in addition to the face amount. Again, the rider provides an additional term insurance benefit equal to the cash value amount at the time of death.
At this point, the riders described are added to the insured's policy and provide the insured (or policy owner) with additional benefits. Riders may also be added to a life insurance policy that provides term insurance coverage for a spouse, children, or entire family. As a whole, these riders are referred to as other insured or dependent (term) riders. The actual name of the rider may or may not include the word "term." Whenever the insured adds a rider to their individual policy that covers the life of another person, the rider's coverage will always be term insurance.
For example, a potential client of an agent or producer wants to purchase a life insurance policy covering their life, but also wants to cover their spouse by adding a rider to their policy if the spouse dies in an accident. To meet their policy needs, what type of rider should be suggested? The reference "if the spouse dies in an accident" gives the impression that the accidental death rider should be added to the policy to satisfy this need. However, this is a dependent rider that would be added to cover the spouse. The accidental death rider is added to the primary insured's policy to cover the primary insured; it does not cover the primary insured's spouse.
Other insured riders generally use convertible level term insurance to cover the other insured or spouse. Children's term covers all the children of the family as a class of insured at a set amount per child. Family insurance riders combine these two coverages into a single rider.
| Rider | Description |
|---|---|
| The family (term) rider | Covers the rest of the family, but not the primary insured |
| The spousal (term) rider | Added to a primary policy to cover a spouse |
| The child or children's (term) rider | Added to an insured's policy to cover children or adopted children |
The exchange privilege rider — also referred to as the substitute or change of insured rider — outlines the conditions and processes for changing the insured of an insurance policy. This rider is typically limited to a business policy that covers a key employee or executive. The goal is to simplify updating the insurance policy when the insured is no longer employed by the business. Although the exchange privilege rider allows for the policy to continue with the same face amount, the premiums are recalculated based on the new insured's age, sex, insurability, etc.
Insurance policies may contain an exclusion provision that provides the insurer with the right to deny a death claim if death is caused by any of the listed exclusions. Exclusions may be listed in the policy itself or attached as riders and referred to as optional provisions or clauses. Today, many exclusions (with the exception of suicide) are being replaced with additional premium requirements (also referred to as a rate-up). Listed below are the most common types of exclusions.
The war or military service exclusion prevents an insurer's financial catastrophe and typically applies to declared and undeclared wars. Most life insurance policies will contain one of two common war exclusion clauses. The status war clause is a restrictive type of clause stating that the insured will not possess coverage under an individual life insurance policy while they are in the military, even if they are killed while away on furlough. The results clause states that an individual policy doesn't provide coverage if the insured dies while participating in military activities or during military maneuvers. If the insured were killed while on furlough, they would be covered under an individual policy.
It's safe to assume that an exam question is referring to the "results clause" unless the exam question explicitly uses the "status war clause."
Although it was common years ago, current life insurance policies are unlikely to exclude death for passengers, crew members, or pilots aboard commercial aircraft. However, most life insurance policies exclude deaths resulting from certain types of high-risk aviation activities.
For example, the activities of a stunt, test, or student pilot, a flight instructor, and aircraft used for agricultural purposes (i.e., crop dusting) are typically excluded.
Some insurance contracts exclude death or injury when it results from the insured committing a felony or doing something illegal. If included in the policy, the exclusion only applies to persons committing the crime since victims or innocent bystanders are always covered.
The illegal occupation provision specifies that the insurer is not liable for losses that are attributed to the insured being connected with a felony or participating in any illegal occupation.
The insurer will typically deny a claim if the insured is intoxicated or under the influence of narcotics at the time of the loss.
Insurers can choose to exclude coverage for deaths resulting from an individual's dangerous occupation, hobbies, or avocations. In the past, excluding occupations (e.g., a high-rise window washer), hobbies (e.g., scuba diving), and avocations (e.g., a doctor who's traveling to a developing country to provide care) was a common practice. However, today, most insurers forgo the exclusion and instead offer the coverage if an extra premium is collected (rate-up). If a specific cause of loss is excluded in the policy, it's excluded forever. If a cause of loss is not excluded in the policy, the cause of loss is covered forever. Hazardous hobbies or occupations may result in the exclusion of certain causes of death by endorsement, resulting in a refund of premiums paid.
For example, let us assume that Robert has been scuba diving for 10 years when he applies for life insurance. The insurance company may tell Robert that, due to the risky nature of scuba diving, death resulting from a scuba-related accident is excluded from his policy (i.e., it's not covered). As such, his policy will contain a scuba diving exclusion form, which becomes part of his entire contract. While on vacation, Robert convinces Carol to go scuba diving. Carol obtained life insurance five years ago, but since she has never been scuba diving, the insurer did not include a scuba diving exclusion in her life insurance policy. Unfortunately, Robert and Carol suffer a tragic accident during their scuba excursion and, as a result, both die. Robert's beneficiary will not receive his policy's death benefit since scuba-related deaths were excluded. However, Carol's beneficiary will receive her policy's death benefit (minus any outstanding policy loans) because scuba-related deaths were not excluded. The insurer cannot change her policy and exclude Carol's death after the fact (post-claim underwriting) since the exclusion form is not a part of the entire contract.
What if Robert failed to tell his insurer that he frequently scuba dives and, as such, the scuba exclusion form was not included in his entire contract? Would his death then be covered? In reality, it depends. If the policy were within the contestable period, the insurer could conduct further research into Robert's scuba-diving history. After learning that Robert was an avid scuba diver, the insurer may determine that Robert was untruthful on the application and exclude the loss. However, if the policy is not inside the contestable period, the incontestable clause forces the insurance company to cover the loss.
Nearly all life insurance policies contain a suicide exclusion, or suicide clause, that excludes payment of the death benefit if the insured dies by suicide within the first two years the policy is in force (the suicide period generally matches the contestable period). If the insured dies by suicide within this period, the insurer's only obligation is to refund the premiums paid, not pay the death benefit. Once the suicide period has passed, however, the death benefit is fully payable even if the death is a suicide. The suicide provision is unique among policy exclusions in that it is the only exclusion that automatically "falls off" the policy after a specified period.