Avoid Life Insurance Policy Gimmicks
“The man is prudent who neither hopes nor fears anything from the uncertain events of the future.” — Anatole France
Life insurance agents are trained to sell you add-ons to your policy. It’s a lot like a fast food attendant asking you if you want to “supersize” your meal, or if you want fries and a coke with your order. The problem with life insurance add-ons, like fast food extras, is that it’s mostly empty calories. In the case of life insurance, it’s deadly to your wealth instead of your health.
The two main add-on options are the Disability Premium Waiver and the Accidental Death Benefit rider. The purpose of the Disability Premium Waiver is to exempt you from having to pay your insurance premiums if you become permanently disabled. The purpose of the Accidental Death Benefit rider, also known as a “double indemnity clause” is to pay your beneficiary twice the death benefit amount if you die as the result of an accident. Both add-ons seem reasonable and necessary, until you consider the odds of actually needing them and the additional costs to having them.
If you are concerned about becoming disabled during the life of your policy, the Disability Premium Waiver may not be the most cost effective way to protect life insurance premium payments. The cost is simply too much for what you are trying to accomplish. Contributing those extra dollars to a general disability policy would be the best choice to pay all your expenses, including your life insurance premiums. Furthermore, if you purchase the lowest cost term policy for an adequate coverage amount, your premiums will not be a major cost.
An Accidental Death Benefit (ADB) rider could actually cost you more than if you purchased a policy for twice the coverage. For example, let’s assume a 35-year-old male could purchase a $300,000 ten year term policy for $119 per year. Let’s further assume that an ADB rider costs only $.75 per $1000 of coverage. To have the accidental death benefit rider in that scenario he would need to pay an additional $225 per year in premiums bringing the cost of this hypothetical policy to $344 per year.
Instead of spending the extra money on the ADB rider, he could have purchased twice the benefit ($600,000 worth of coverage) for a total premium of only $188 per year. In both cases, if he died accidentally his beneficiary would receive the same amount, but by eliminating the ADB rider to achieve the same benefit amount he saved an extra $156 per year.
Obviously an ADB writer is not a good value. But you will have to run the numbers for yourself to make that determination. If your agent offers you the ADB rider, ask him the cost per $1000 of coverage. Then do the math. Compare the results with a policy for twice the death benefit amount to see if it’s a good deal or not. Is it really just “a few dollars more,” as the agent will tell you?