Purchase Option Rider
Let's change our focus to an equally important rider that guarantees the policyowner the right to buy additional coverage. It is known as a guaranteed insurability option or purchase option rider.
When an applicant purchases disability income insurance, he or she usually buys the maximum amount that is offered; normally that is about 60% to 70% of his or her gross income. As the applicant's income increases, however, that earlier disability income purchase will probably become insufficient to meet increasing expenses. The insured may have bought a bigger house with a larger monthly mortgage payment and may have children in private schools. At the same time, the insured's health may have deteriorated, resulting in his or her uninsurability. A disability purchase option rider solves that problem.
A disability purchase option rider allows the insured, usually on specific policy anniversary dates, to increase the monthly benefit payable in the event of his or her future disability without regard to his or her current health. In other words, there is no medical underwriting done when a new policy is purchased under the option rider. In most cases, the benefit period may not be longer on the new policy nor may the elimination period be shorter than on the original policy. In addition, the new policy is issued at the same occupation class as the original policy.
The disability purchase rider usually waives only the non-financial aspects of the normal disability income insurance underwriting. The insured must still meet the insurer's limit on the amount of disability income insurance it will issue, based on income.
The increased coverage that is purchased as a result of the insured's exercise of the disability purchase option requires the insured to pay the premium based on his or her attained age. Usually, the policy issued under the option may contain any of the riders, other than the disability purchase option rider, that are attached to the original policy.
Some interesting variations on this approach are also available. Under one approach, the disability purchase option rider is issued for an aggregate option amount rather than a maximum monthly amount that may be purchased on each option date. The aggregate option amount is usually limited to no more than the amount of monthly income that is provided by the original policy.
The aggregate approach to the design of the disability purchase option rider permits the insured, on each policy anniversary, to exercise an option for the entire remaining aggregate amount or some portion of it. Since the underwriting of disability income insurance purchased under a disability purchase option rider is limited only to financial underwriting, exercise of the option is subject only to his or her ability to meet the earned income requirements for the opted amount. Not unexpectedly, the aggregate disability purchase option design is particularly useful when working with a client whose income is likely to increase dramatically over a short period.
Disability purchase option riders are usually issued to a maximum age of 40 or 45.