Policy Rider

Fenwick owns a whole life policy on his own life. He wants term coverage on his wife, who has no coverage of her own, attached to that same contract rather than bought as a separate policy. Which rider accomplishes this?

1. A.A payor benefit rider.A payor benefit rider sits on a juvenile policy and waives premiums if the adult who pays them dies or becomes disabled. It provides no death benefit on the adult.
2. B.A guaranteed insurability rider.A guaranteed insurability rider lets the BASE insured buy additional coverage on his own life at scheduled option dates without evidence. It never covers a second person.
3. C.An OTHER-INSURED, or spouse, rider: term insurance on a person other than the base insured, attached to the base policy.Correct. The rider covers the wife under Fenwick's contract, usually more cheaply than a small standalone policy, and typically carries a conversion privilege for her.
4. D.A waiver of premium rider.Waiver of premium keeps the policy in force without payment if the BASE insured becomes totally disabled. It adds no coverage on any other life.

Why: An OTHER-INSURED rider, often called a spouse rider or additional-insured rider, adds term insurance on a person other than the base insured to an existing policy. It is convenient and usually cheaper than a small standalone policy because it shares the base contract's issue costs, and it commonly carries a conversion privilege letting the covered person obtain individual permanent coverage without evidence of insurability. The rider terminates on its own schedule, and often on divorce or on the base insured's death, subject to that conversion right.

A frequent traveller adds a rider that pays an extra multiple of the face amount, over and above both the base death benefit and the ordinary accidental death benefit, but only if death results from an accident occurring while the insured is a fare-paying passenger on a scheduled airline, train, bus or ferry. What is this rider, and why is its premium so small?

1. A.A waiver of premium rider; the premium is low because total disability is rare.Waiver of premium pays no death benefit at all. It keeps the policy in force by waiving premiums during total disability, and disability is far from rare.
2. B.An accelerated death benefit; the premium is low because the benefit is only an advance of money already owed.An accelerated death benefit pays part of the existing face amount early on terminal or chronic illness and reduces what the beneficiary receives. It never pays an extra multiple.
3. C.A return of premium rider; the premium is low because the benefit is capped at premiums paid.A return of premium rider refunds premiums to a surviving insured at the end of the term. It has nothing to do with accidental death or with travel.
4. D.A COMMON CARRIER accidental death rider; the premium is very low because the covered event is narrow and statistically rare.Correct. Restricting payment to accidental death as a fare-paying passenger on scheduled public transport makes the expected cost tiny, which is why the multiple can look so generous.

Why: A COMMON CARRIER accidental death rider pays only for accidental death while the insured is travelling as a fare-paying passenger on a licensed public conveyance. Scheduled commercial transport is statistically among the safest ways to travel, so the covered event is extremely rare and the expected cost to the insurer is tiny. That is why very large-sounding multiples can be offered for a trivial premium, and why such riders are a poor substitute for base coverage.

Rhodri's whole life policy is fully paid up and will remain in force for the rest of his life. He is surprised to learn that his waiver of premium rider and his accidental death benefit rider will each stop at an age shown in the policy, while the base coverage continues. Why?

1. A.Because riders are separate contracts the insurer may cancel at will.Riders are not cancellable at the insurer's whim. They terminate according to the terms printed in the contract, which the owner agreed to at issue.
2. B.Because a rider terminates automatically as soon as a policy becomes paid up.Paid-up status ends premium payments on the base policy; it does not by itself end riders, several of which can continue on a paid-up contract.
3. C.Because each rider is a supplemental benefit with its OWN terms, including its own expiry age, operating independently of the base policy's duration.Correct. Riders whose cost climbs steeply with age are commonly written to expire at a stated age, while the base contract continues for life.
4. D.Because rider benefits are available only while premiums are actually being paid.A paid-up policy can still carry riders, and a waiver of premium rider by definition operates when premiums are not being paid at all.

Why: A rider is a supplemental benefit attached to a policy, and it carries its OWN terms, including its own premium, its own conditions and its own expiry. Riders whose cost rises sharply with age, such as accidental death and waiver of premium, are routinely written to terminate at a stated age even though the base contract continues for life. Termination of a rider does not affect the base policy, and termination of the base policy ends every rider attached to it.

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.