What it means
The add-on, called a rider, is attached to the main policy for an extra charge. If the policyholder suffers a disability that meets the contract definition and lasts beyond a waiting period, the insurer pays the premiums on their behalf until recovery or the end of a stated period.
The definition of disability matters a great deal. Some contracts require the policyholder to be unable to do their own job, while others require inability to do any job for which they are suited, and the second definition is harder to meet.
Most contracts have a waiting period, often three to six months, before the waiver begins. Premiums due during that period normally have to be paid by the policyholder, though some insurers refund them once the waiver is approved.
For businesses, the rider is relevant to key person cover and to policies used to fund buy-sell agreements. If the key person is disabled, the company's premium burden is removed while its protection continues.
There are limits. Many riders end at a certain age, the extra cost is usually a small percentage of the main premium, and the insurer can ask for medical evidence of ongoing disability.
Policyholders should read the exclusions, which may cover disabilities caused by certain activities. The rider is worth comparing with the alternative of simply paying premiums out of savings or other disability income.
For a long-term policy with large premiums, the waiver can be valuable, but for a small policy the extra cost may outweigh the benefit.
In practice
Real-world examples.
Example
A 45-year-old consultant has a $500,000 life policy to protect her family and adds the rider. She is injured in an accident and cannot work for 18 months. The insurer pays the premiums, so her cover continues without a gap. Her family keeps the full protection even though she has no earnings during the recovery.
Example
A manufacturing company holds a key person policy on its engineering director. The director is seriously ill for a year and meets the disability definition. The company stops paying premiums while the policy remains active. The finance team records the saving in its cash forecast for the period.
Example
A self-employed builder buys a rider for a modest charge but later breaks his arm and recovers in six weeks. The disability does not last through the waiting period, so no premiums are waived. He continues to pay as normal. The rider cost him a small amount each year but never produced a payout.
Formula
Calculation
Premiums waived = Monthly premium x (Months of qualifying disability - Waiting period months)
A business owner pays a monthly premium of $200 on a life policy with a waiver of premium rider and a three-month waiting period. She is disabled for 12 months and her claim is approved. Premiums she pays during the waiting period = 200 x 3 = $600. Premiums waived = 200 x (12 - 3) = 200 x 9 = $1,800. Assuming no refund for the waiting period, her total premium cost over the 12 months = $600. If the insurer does refund the waiting period premiums, the waived amount would be 200 x 12 = $2,400 and her cost would be zero.Case study
Seen in the real world.
Ashgrove Engineering is an illustrative, fictional company that holds a $1,000,000 key person policy on its founder. The annual premium is $6,000 and the company added a waiver of premium rider for an extra 4%, or 6,000 x 4% = $240 a year.
The founder suffered a stroke and was unable to work for 14 months. After a three-month waiting period, the insurer approved the claim and waived the premiums for the remaining 11 months.
Monthly premium was 6,000 / 12 = $500, so waived premiums = 500 x 11 = $5,500. In the illustrative outcome, the company recovered more than twenty times the cost of one year of the rider, and the policy stayed in force when the business needed the protection most.
Watch out
Common mistakes.
- Assuming the waiver starts on the day of the disability, when most contracts have a waiting period during which premiums must still be paid.
- Not checking the definition of disability, which decides whether a claim is accepted.
- Believing the waiver reduces the sum assured, when it only removes the premium obligation and leaves the cover unchanged.
Questions
People also ask.
Does a waiver of premium cost extra?
Yes, it is usually priced as a modest percentage of the main premium, depending on age, occupation and the definition of disability.
Can premiums be waived for a short illness?
Generally not, because disability must be serious and last longer than the waiting period. A temporary condition that clears up in a few weeks will not qualify.
What happens when the policyholder recovers?
Premiums resume from the date of recovery, and the policy continues as normal.
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