Guaranteed Insurability Rider

At age 26 Delphine Okoro buys a whole life policy and pays extra for a GUARANTEED INSURABILITY rider. At 32 she is diagnosed with a chronic illness that would ordinarily make her uninsurable. The rider entitles her to:

1. A.Receive part of the death benefit while living because of her diagnosisThat is an accelerated death benefit or chronic illness rider, a different feature entirely.
2. B.Buy additional stated amounts of coverage at specified future dates or life events without new evidence of insurability, priced at her attained ageCorrect. The rider locks in the RIGHT to buy more coverage, not the price of the original policy.
3. C.Convert the whole life policy into term insurance at any time without underwritingConversion privileges run from term to permanent coverage, not the reverse, and are a feature of term policies.
4. D.Stop paying premiums and keep the policy in force because she has become illThat is a waiver of premium rider, and it is generally tied to disability rather than to any diagnosis.

Why: A guaranteed insurability rider lets the owner buy additional stated amounts of coverage at specified future ages or life events without new evidence of insurability. Premiums for the added coverage are set at her attained age at the time of purchase, but her deteriorated health cannot be used to decline the additional coverage or to rate it up. That is the entire point of buying the rider while young and healthy.

Meline Achterberg holds a guaranteed insurability rider whose scheduled option dates fall every three years, with the next one nineteen months away. She marries in March and her first child is born the following January. She is now uninsurable due to a new diagnosis. Her producer tells her she may not have to wait for the scheduled date. What feature is he referring to?

1. A.An alternate option date triggered by marriage or the birth of a child, which lets her exercise an option immediately without evidence of insurability.Correct. Defined life events open an early exercise opportunity, and the rider guarantee of insurability continues to apply.
2. B.A cost of living adjustment, which automatically raises her coverage after a qualifying life event.Wrong. A cost of living rider indexes coverage to an inflation measure automatically. It is not triggered by personal life events and involves no election.
3. C.The waiver of premium benefit, which suspends the option schedule while she is uninsurable.Wrong. Waiver of premium responds to total disability and pays premiums. It does not alter the option schedule of a guaranteed insurability rider.
4. D.The conversion privilege, which lets her exchange her existing coverage for a larger permanent policy.Wrong. Conversion exchanges term for permanent coverage at the SAME amount. It does not increase the total amount of insurance.

Why: Many guaranteed insurability riders provide ALTERNATE OPTION DATES tied to defined life events, most commonly marriage and the birth or legal adoption of a child, sometimes also a milestone such as the purchase of a home. On the occurrence of such an event the owner may exercise an option immediately rather than waiting for the next scheduled date. Exercising on an alternate date ordinarily consumes the next scheduled option rather than adding an extra one, so the total number of options is unchanged, and there is normally a limited window after the event in which the election must be made. The whole value of the feature is that insurability is never re-examined: the underwriting judgment was locked in when the rider was issued, which is exactly why a newly uninsurable owner like Meline can still buy the additional coverage.

Two riders raise a policy's face amount over time without new underwriting. Rider ONE increases the benefit by a stated percentage on each policy anniversary, according to a schedule written into the contract when it was issued. Rider TWO raises the benefit in step with a published inflation index, so the increase differs from year to year. How do the two differ?

1. A.Rider ONE is a guaranteed insurability rider and rider TWO is an accelerated benefit.A guaranteed insurability rider gives the owner an OPTION to buy more coverage at scheduled dates; it does not raise the face amount automatically. An accelerated benefit reduces the death benefit rather than increasing it.
2. B.Rider ONE is an AUTOMATIC INCREASE rider whose increases are fixed in advance; rider TWO is a COST OF LIVING rider whose increases track an external index.Correct. A predetermined schedule in the contract is the automatic increase design, while indexing the benefit to published inflation data is the cost of living design.
3. C.They are the same rider under two names, and both track a published index.Only one tracks an index. The other raises the benefit on a schedule fixed when the policy was issued, independent of any economic data.
4. D.Rider ONE requires evidence of insurability at each increase, while rider TWO does not.Neither ordinarily requires evidence at the time of an increase. Avoiding new underwriting is the reason an owner buys either rider.

Why: An AUTOMATIC INCREASE rider raises the face amount on a fixed, predetermined schedule set out in the contract, so the owner knows in advance what the benefit and the premium will be in each future year. A COST OF LIVING rider ties the increase to an external inflation index, so both the increase and the additional premium vary with published data. Neither ordinarily requires evidence of insurability at the time of an increase, which is the point of buying either one.

Bramwell and Ottoline own a survivorship policy bought to fund estate tax at the SECOND death, on the assumption that the unlimited marital deduction defers tax at the first death. They divorce, and each now needs coverage payable at his or her own death. Which rider lets them respond without new underwriting?

1. A.A POLICY SPLIT OPTION rider, which on a defined triggering event such as divorce permits the survivorship contract to be exchanged for two individual policies, generally without evidence of insurability.Correct. The rider anticipates exactly this problem: the reason for second-to-die coverage disappears, and the insureds need individual policies at a point when they may no longer be insurable.
2. B.An estate preservation rider, which increases the death benefit if both insureds die within a short period after issue.That rider addresses a different problem, the estate tax exposure if both insureds die before the estate plan matures. It adds benefit; it does not divide the contract.
3. C.A guaranteed insurability rider, which lets each insured buy separate coverage at scheduled option dates.A guaranteed insurability rider adds new coverage at predetermined dates. It cannot be triggered by a divorce and does nothing about the survivorship contract they already own.
4. D.A conversion rider, which changes a term policy into a permanent one.Conversion changes the TYPE of coverage on the same insured. It does not separate a two-life contract into two single-life contracts.

Why: A POLICY SPLIT OPTION rider permits a survivorship contract to be exchanged for two individual policies, one on each insured, when a defined triggering event occurs. Typical triggers are divorce or a change in the tax law that removes the reason for buying second-to-die coverage, such as repeal of the unlimited marital deduction. The split is generally available without evidence of insurability, which is exactly what makes the rider valuable, since the whole risk of a survivorship policy is that the plan changes while the insureds are no longer insurable.