The role of riders: Enhancing policy flexibility and protection

Once upon a time, a life insurance policy was seen as a static promise, a simple transfer of risk upon death. But now, clients face risks that demand not only a death benefit, but also a financial tool designed to weather market volatility, health crises and the costs of longevity.

In the indexed universal life space, the policy rider is the essential key to unlocking this dynamic utility. Riders are more than mere add-ons; they are contractual enhancements that elevate the IUL policy from a simple risk management tool to a customizable, multifaceted wealth and health planning instrument.

Riders are no longer optional features but essential mechanical systems that ensure the contract functions perfectly across a client's entire lifespan. Our mastery of these enhancements dictates our ability to solve today's most complex planning challenges.

The market certainly agrees with the emphasis on IUL, as IUL has firmly cemented its place as a core planning tool. Data from LIMRA shows that IUL new premiums totaled a record-high $3.8 billion in 2024, representing about 24% of the total U.S. individual life insurance market premium. This sustained growth demonstrates the client demand for products that offer both death benefit protection and the potential to accumulate cash value.

The power of living benefits

The most compelling riders deliver liquidity precisely when financial stress is highest. These living benefits address the risks of longevity and health crises, effectively bridging the policy's value with the client's immediate, critical needs.

Accelerated benefits: The crisis firewall

The most common failure in a client's financial plan occurs when a sudden catastrophic illness forces them to liquidate retirement assets to cover expenses. Accelerated death benefit riders covering terminal, chronic and critical illness, are the client’s emergency liquidity line. They fundamentally change the policy's purpose from merely paying a future liability to solving a present crisis.

In my practice, the ADB rider prevents the forced liquidation of other, more sacred assets—such as a client's 401(k) or nonqualified brokerage accounts—to cover catastrophic medical costs. This is critical to maintaining the client’s broader retirement and legacy plans.

From a planning perspective, these payments often receive favorable tax treatment. Funds received under these riders for terminal or chronic illness are generally treated as an amount paid by reason of death, which is typically excluded from gross income under IRC Section 101(g) of the Internal Revenue Code 26 U.S. Code § 101 - Certain death benefits - Cornell Law School LII. This tax efficiency elevates their value far above that of alternatives such as personal loans or asset sales.

Long-term care riders: Addressing longevity risk

The rising cost of extended care is arguably the most significant financial blind spot for many middle- and upper-market clients. I often present the long-term care rider (or linked benefit riders) as the most elegant hedge against this risk, offering a superior alternative to self-insuring.

Consider the gravity of the statistics: the national median annual cost of a private room in a skilled nursing center reached $127,750 in 2024, according to Genworth's Cost of Care Survey.

LTC riders, particularly in the hybrid structure, are the elegant solution. They provide a leveraged, contractual payment stream for care expenses, eliminating the risk of total financial depletion while ensuring that if care is never needed, the full death benefit still passes to the beneficiaries. It's a dual-purpose asset that solves the core risk of living too long and depleting capital.

Fortifying policy protection: Structural integrity riders

Living benefits capture the headlines, but structural riders are silent workhorses that ensure the policy stays sound and performs as illustrated. If a client's income stops, the policy integrity is immediately compromised. The following riders are the essential safety features that protect the policy's long-term structure.

The waiver of premium rider: Securing the policy

For IUL, the waiver of premium rider is arguably non-negotiable. If the insured suffers a long-term disability, the WOP rider steps in, allowing the carrier to pay the planned premium. This simple action is crucial because it does three things:

1. Prevents lapse. The policy stays in force.
2. Protects cash value. The cost of insurance charges doesn't erode the accumulation.
3. Preserves growth. The cash value continues to participate in the indexed crediting, keeping the policy on track with the original illustration.

In essence, the WOP rider safeguards the entire financial contract, securing the death benefit and protecting the policy’s tax-advantaged growth from the single greatest threat to human capital: the cessation of income.

Guaranteed insurability rider: Future-proofing the contract

A young client’s need for coverage almost always grows with their income, assets and family. The guaranteed insurability rider allows us to be proactive.

The GIR permits the policy owner to purchase specified amounts of additional death benefit at predetermined intervals (e.g., ages 25, 30, 35) or life events (e.g., marriage, birth of a child)—without providing further evidence of insurability. This is critical for young or rapidly successful clients. We lock in their health class today, guaranteeing their capacity to meet greater future needs even if their health deteriorates.

From product seller to policy architect

The modern client wants to buy more than a death benefit; they want to invest in a custom-engineered solution to manage complex wealth, health and longevity risks. And the key to personalized solutions is the correct blend of riders to ensure dynamic protection.

Balance the rider's cost against its utility, ensuring the expense doesn't unduly dilute the policy's internal rate of return or cash value performance. Be sure to provide comprehensive disclosure, ensuring the client grasps the exact contractual definitions and triggers for every living benefit.

Embrace your role as policy architects to serve our clients best moving forward.

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Jay Scheiner is CEO of ASG – An AmeriLife Company. Contact him at [email protected].