Financial advisors often question the usefulness and costs of riders on term and permanent insurance policies, but also say there are a few situations in which the riders could come in handy.

Almost all insurance companies offer three common riders on term and permanent life insurance policies, although these go by different names: children’s protection rider, disability waiver of premium, and accidental death benefit.

There are a variety of others, such as those for critical illness, as well as the generic “living benefit” rider and the accelerated terminal illness rider, which, in turn, vary from manufacturer to manufacturer.

Here is a look at how two common riders — the children’s protection and the disability waiver of premium — can serve clients’ needs:

> Children’s Protection Rider Advisors commonly use the children’s protection rider, also called the guaranteed insurability rider for permanent insurance, for clients with at least one child. On the face of it, the rider provides the dreaded insurance on the policyholder’s child’s life — but the rider’s flexibility makes it more useful than that.

Although nobody believes that a $10,000 lump-sum payment to a parent would salve the pain inflicted by the death of a child, the benefit of this rider is that it’s convertible into insurance for the child once he or she reaches a certain age, which varies by manufacturer. Also important is that the rider’s option comes without evidence of insurability.

Tina Tehranchian, branch manager with Assante Capital Management Ltd. in Richmond Hill, Ont., says this rider has been useful for many of her clients whose children have become afflicted with juvenile diabetes or other conditions that make them uninsurable — at least, not without great cost — when they reach the age at which they’re controlling their own finances. “There are points in the children’s lives,” she says, “such as when they’re 18 or 21, when they can exercise the conversion.”

For example, if the children ever need insurance to cover a mortgage or another liability later in their lives, this rider becomes important.

The value of the benefit varies by manufacturer. Many policies offer up to $10,000, but, more important, with an option to multiply the value of the policy by many times (by how much also varies by manufacturer) on the date of the conversion of the policy to the child.

The rider doesn’t cost much — usually between $5 and $10 per month — and it effectively guarantees that a policyholder’s children can gain access to life insurance when they’re older, regardless of their health.

Cindy David, a financial advisor with Vancouver-based Ray-mond James Ltd., prefers Canada Life Assurance Co. and Manulife Financial Corp. as manufacturers because they offer this rider with a $250,000 lump-sum payment that she can use in addition to permanent plans that come with caps on children.

She uses the riders for intergenerational estate planning in which the intention is that the child will be taking over the estate.

David, who holds the chartered life underwriter designation and specializes in estate planning for Raymond James, says clients with trusts or holding-company assets can effectively make the estate the beneficiary of the insurance policy, knowing that the child will ultimately own the assets.

“Parents want to cover the tax costs on the transfer of the assets at their death,” she says, “but they also want to plan in advance for the taxes payable on the disposition of the child’s shares.”

The rider strategy works better than buying additional permanent insurance for the estate because the trust has to be disposed of every 21 years at most. The rider on the original policy comes at a much cheaper premium than a separate policy in the event that the value of the estate fluctuates, explains David: “Then, the client hasn’t spent a whole bunch of money on insurance they don’t need.”

It’s important to note that this rider usually includes all children — even if they’re born after the purchase of the policy.

> Disability Of Waiver Premium. Advisors are split on the usefulness of this rider, which allows term insurance policyholders to waive their premiums for an extended period of time should they meet the criteria in the insurance policy’s contract that qualifies them as “disabled.”

Usually, this rider kicks in after six months of disability for as long as the policyholder is alive, up to the age of 65.

@page_break@Some advisors don’t like this rider, believing independent disability insurance should be designed to meet potential liabilities and costs more exactly, not just against the random cost of term insurance.

Tehranchian agrees to some extent, but her practice focuses on the self-employed — who don’t tend to have as much coverage. Either they can’t qualify for stand-alone disability coverage because of the way they report their income or the benefit isn’t high enough. “In that case,” she says, “even though $100 or $200 in term insurance premiums per month isn’t a lot, if you’re disabled, every dollar comes in handy.”

Waiving that monthly term insurance premium for a few months could come in very handy. But she notes that once the client is over the age of 50, the rider becomes very expensive: “So, [at that point], you have to think twice.”

Policy manufacturers offer surprisingly few other riders that advisors often use for their clients. The insurers seem to recognize that very specific riders have only niche markets. And even if insurers did offer such riders, it would be almost impossible to make a profit from them considering the costs of marketing and underwriting.

In the May issue of Investment Executive, we’ll examine the accidental death and dismemberment rider, as well as the variations on the living benefits rider, including CI, which is an expensive product to underwrite. Thus, it’s not surprising the latter isn’t offered by all manufacturers — and those that do offer it have very tight guidelines.

IE