The waiver-of-premium rider is a form of disability insurance that provides that the basic policy (and often other riders) will continue in force if the insured becomes disabled and incapable of paying premiums. However, if policyowners have taken loans against their policy cash values, interest is still due on the loans. If interest on the policy loans is drawn from policy cash values (rather than paid in cash by the policyowner) and loan balances and interest charges are large relative to the net cash value, the policy could still lapse if the interest charges deplete the net cash value to close to zero.
Waiver of premium riders differ among companies and policies with respect to the period of coverage, the waiting period needed to qualify, and the definition of total disability.
Period of Coverage
In the event of disability, the insurer essentially pays the premiums for the policyowner/insured for a specified period of time that varies from company to company. If disability occurs before age sixty, most companies will waive premiums for as long as the disability continues or until the policy would otherwise terminate or endow. Some policies become paid up at age sixty-five. If the waiver of premium rider is in effect at the time a policy becomes paid up, the insurer would not require the insured to resume premium payments even if he should overcome his disability.
If the insured becomes disabled after age sixty, about half the companies’ provisions provide no waiver of premium benefit. Of those companies that do provide a waiver of premium benefit for disabilities occurring after age sixty, most will waive premiums only to age sixty-five, although some specify a period equal to the length of a specified minimum number of years or to age sixty-five or seventy. For example, the rider may specify that if disability occurs after age sixty, premiums will be waived for two years or until the insured is age sixty-five, whichever is longer.
Most companies use a waiting period of six months before insureds qualify for a disability waiver of premium benefits. However, some companies use a shorter period of four months or less.
Definition of Total Disability
The definition of total disability varies widely and may be more or less liberal. It is therefore critical when shopping for a policy to determine which definition insurers are using in the policies one is considering.
- A majority of the insurers use what advisers generally consider the most liberal definition:
- Inability to perform one’s own job for two years, then any job for which reasonably suited by education, training, and experience.
- A sizable minority of insurers use a somewhat less liberal definition:
- Inability to perform any job for which reasonably suited by education, training, and experience.
- A few insurers use a very limiting definition of total disability:
- Inability to perform any job for pay or profit.
Many insurers use a duration-varying definition of disability where, for instance, they will use the most liberal “own job” definition for the first two to five years of disability and then switch to the somewhat less liberal “job for which reasonably suited” definition. Some insurers may even switch again at a later date to the “inability to perform any job” standard. Given the many possibilities or combinations of disability definitions and time frames when the insurers use the various definitions, persons seeking to buy insurance with a waiver of premium rider should review the specifics of the rider carefully.
Most insurers’ definitions also include conditions that are presumptive of total disability. Typically insurers presume the “loss of use of” or less liberally, the “loss of” two body members such as an arm and a leg, or of sight, to constitute total disability qualifying for waiver of premium. Some companies even include total loss of hearing as a presumptive condition. A minority of insurers include no presumptive conditions in their definition of total disability.
Disability Waiver of Policy Charges Rider
The disability waiver of policy charges rider (also called a disability waiver of deductions rider) essentially serves the same purpose as the disability waiver of premium rider, except that it applies with respect to universal life policies and other flexible-premium policies. UL and other flexible-premium policies generally do not set required periodic premium payment levels and policyowners usually are free to vary their premium payments over time. Thus, instead of stating the benefit in terms of waiving required premium payments, the rider states the benefit in terms of waiving virtually all monthly deductions such as mortality charges, expenses, and other fees and loads generally including charges for any special provisions and riders. However, also similar to disability waiver of premium riders, a disability waiver of policy charges rider will help policyowners to avoid lapses of their policies in the event of their becoming disabled and being unable to pay premiums. However, lapses could still occur if the policyowners have taken large loans from their policies relative to the cash values. If their net cash values are insufficient to pay ongoing interest on these loans until the policyowners are again able to pay amounts at least large enough to cover the interest charges, their policies will lapse.
Similar to disability waiver of premium riders (described above), disability waiver of policy charges riders for UL policies and other flexible-premium policies differ with respect to the period of coverage, the waiting period needed to qualify, and the definition of total disability. However, the differences from company to company and policy to policy are of the same types and ranges of differences as were described above in the discussion of disability waiver of premium riders.
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM