Waiver of premium allows you to skip your life insurance payments if you become disabled and cannot work. It’s an extra layer of protection for folks who may not have enough emergency funds set aside to cover a year or two of life insurance payments.
It’s a small additional premium for extra peace of mind that the life insurance premiums will stay manageable.
Quick Summary: With a 1 in 4 chance of becoming disabled for 90+ days during your working years, waiver of premium can save you hundreds of dollars on your life insurance premiums. Compared to the minuscule cost of the rider, it can be a worthwhile decision if money is already tight. Since each company writes their contracts with some differences, make sure you understand the language of this rider. Otherwise, you might not be as covered as you think you are.
Waiver of Premium Definition
Waiver of premium stops the payment requirements for a life insurance policy when you meet specific conditions. Specifically, you don’t have to pay your premiums if you become disabled and cannot work.
Like a disability insurance policy, the occupation definition is the defining feature of this rider. If you have an any occupation definition, you might be in trouble. Any occupation means that you can do any occupation.
As an example, let’s say Bob is a software engineer. He becomes disabled and cannot do his regular job. However, Bob has an any occupation definition on his waiver of premium rider. If the insurance company takes a look at his medical records and determines he could be a Walmart greeter, then they can deny his waiver of premium.
So look carefully at your occupation definition with your life insurance agent. Some companies will offer an own occupation definition for the first two years then switch it to an any occupation definition.
Modified own occupation and true own occupation are both reasonable definitions to have.
Waiver of Premium for Payor
Waiver of premium for payor is a slight modification on the standard waiver of premium rider.
This is the waiver of premium for the person paying for the life insurance policy when they are not the person covered.
For example, many parents will have small life insurance policies for their children. Most of these policies turn into whole life policies upon the child reaching adulthood so they can start out their adult lives covered.
A waiver of premium for payor on this type of policy will mean the company will waive premiums if the parent paying for the policy dies or becomes disabled.
When Does the Waiver of Premium Rider Kick In?
Of course, each company has different requirements for waiver of premium to kick in. It would be too easy if they were all the same.
The good news is they are all reasonably similar.
Most companies have a 3 – 6 month waiting period. This is to avoid waiver of premium requests when someone breaks their arm and can’t work for six weeks.
How Does the Life Insurance Company Determine Disability?
Luckily for us, they don’t get to determine whether you are disabled or not. Your doctor does.
If your doctor says that you cannot or should not do your job, the life insurance company considers you disabled until you can return to work.
Life and disability insurance companies do reserve the right to request updates on your condition. They also occasionally will ask for another doctor’s opinion. But only in cases where they think insurance fraud might be happening.
What Are the Restrictions & Are There Any “Gotchas”?
There is this horrible feeling when you have an issue with your phone or other electronic and the customer service person says, “Sorry, you didn’t buy the extended warranty, so I can’t help you.”
Usually, they don’t phrase it like that, but you get the idea. Expectations of customer service met with “sorry, you didn’t do X” is probably one of the leading causes of high blood pressure. (It isn’t, but if you haven’t experienced this, consider yourself lucky.)
There are a few pitfalls you should know about with waiver of premium. Some we touched on but will cover again just because we don’t want that to happen to you.
How Long Will the Company Waive Premiums?
Waiver of premium rarely lasts indefinitely. Most life insurance companies will stop the waiver of premium after two years. Other companies will change the occupation definition after two years. Check your contract.
We talked about the occupation definition above. Avoid an any occupation definition if you can. It stinks. The language in the contract will probably look something like this “insured cannot do his/her occupation or any other occupation.” The occupation definition that is worth considering does not have that “or any other occupation part.”
Sometimes companies will get tricky. They will write “cannot do his/her normal occupation or any other occupation by which he/she is qualified by education or training.” That’s sneaky. You may have a degree in aerospace engineering which qualifies you to do several impressive things. You probably got a high school diploma on the way there. That qualifies you to do many more things that will not provide the income necessary to support your accustomed manner of living. Also, remember that terrible job you had back in high school? That counts as experience.
Many life insurance companies will restrict the adding the waiver of premium rider above a certain age. Usually, that falls around age 55 but varies.
If you add a waiver of premium rider to a permanent life insurance contract, there is also an age where you can no longer use it. This is a little higher, usually around 60 or 65.
Normal Disability Insurance Exclusions
If you ever look into buying disability insurance, you will find that there is always a list toward the back of a contract of things that the insurance companies will not cover.
The waiver of premium rider will usually follow along the same lines.
Look at your life insurance policy section on waiver of premiums to see if it excludes the following situations.
A disability resulting from:
- War or terrorism
- While committing a felony
- Self-inflicted injury
- Pre-existing conditions mentioned explicitly in the contract based on underwriting
These may be other exclusions depending on your life insurance company.
Who Should Look Into Waiver of Premium?
According to the Council for Disability Awareness, 1 in 4 millennials will suffer a disability during their working years. Those are the current odds of having to use your waiver of premium.
If you can comfortably cover your life insurance premiums from your rainy day fund if your disability lasts for 2+ years, you probably don’t need it. Although if you are risk-averse, it may bring you peace of mind.
If you are at risk for disability and may not have the ability to pay for your life insurance for 2+ years without income, it’s a worthwhile rider to look into. A quick cost-analysis can tell you how much you’ll spend versus how much you may save down the line. Your life insurance agent should be able to tell you exactly how much you will pay for a waiver of premium rider. (They are usually relatively cheap.)
At the end of the day, it’s up to you and your family whether the extra money is worth the peace of mind. If you worry about becoming disabled during your working life, you could also consider a disability insurance policy to cover any costs while you recover.
Most people don’t think they will have any issues with disability. But a disability can be anything from chronic carpal tunnel to an inability to work due to chemotherapy. A waiver of premium rider is an excellent peace of mind for your own policy, but you may not ever need it. A more important situation for this rider is a payor waiver of premium on a child’s insurance policy. Until the child is old enough to take on their own financial responsibilities, if something happens to the person paying for their policy, they may lose the policy altogether.
How Abrams Insurance Solutions Can Help
If you have any questions about waiver of premium that we didn’t answer, feel free to call us. You can reach someone with answers at 858-703-6178. We are happy to answer your questions. Remember, that as independent agents we work for you and not for any insurance company.