Dread Disease Rider

What Is a Dread Disease Rider?

A dread disease rider, also called a critical illness rider, is an addition to a life insurance policy that provides the policyholder a percentage of the death benefit if they are diagnosed with a severe disease. The rider specifies which illnesses the policy will cover and the payout is used to offset the costs associated with the treatment of the disease. Illnesses typically include cancer, kidney failure, organ transplant, a stroke, or a heart attack.

How a Dread Disease Rider Works

Many life insurance policies will allow the addition of a dread disease rider. The rider will use the death benefit as the basis of coverage, and the funds paid will deduct from the total available death benefit amount at the policyholder's death.

Other more comprehensive types of health insurance will cover most medical expenses, although co-payments, deductibles, and other out-of-pocket costs may limit the benefits. The costs associated with critical diseases can be substantial and cause financial distress — even bankruptcy — which a dread disease rider insurance can help alleviate. Critical illness coverage is also available as a standalone insurance policy.

Money from a dread disease rider is typically used to offset the costs associated with the medical treatment of the disease. Usually, the policy payout is a lump sum amount but may be structured to pay out a regular, monthly income. Benefits can cover costs to the policyholder, such as a second opinion or co-payments.

A dread disease rider will usually expire or have a reduced benefit when a policyholder reaches a certain age, such as 65.

Special Considerations

Riders have specific stipulations about when they will go into effect and which illnesses they cover. Many riders, for example, will have a waiting period, such as 90 days.

In some markets, the definition of a claim for many of the diseases and conditions has become standardized to encourage all insurers to use the same claims definition. The standardization of claims definitions serves many purposes, including increased clarity of coverage for policyholders and greater comparability of policies from different offices.

Most dread disease riders require the policyholder to survive a minimum number of days, known as the survival period, from the first diagnosis of the illness. It varies by company, but 14 days is the standard.

Criticisms of Dread Disease Riders

Not every disease is allowable under these individual riders. Types of ailments that are covered can include life-threatening forms of cancer, Alzheimer’s disease, Parkinson’s disease, heart disease, loss of limbs, organ transplants, paralysis, blindness, coma, and others. Also, there is coverage for some disorders in women but not in men, such as breast cancer.

Dread disease rider contracts will contain specific rules that define when a diagnosis of a critical illness is considered valid. It may require that a physician who specializes in that illness or condition make the determination. Another stipulation may be that a specific test — or series of tests — confirms the diagnosis.

Technology and the methods used for diagnosing and treating many diseases have changed over time. The financial need to cover some illnesses, deemed critical a decade ago, is no longer considered necessary today. And some of the conditions included under riders today may no longer need this kind of coverage a decade in the future. The actual conditions covered depend on the market need for the coverage. Competition among insurers, as well as the policyholder's perceived value of the benefits offered, also plays a part in offerings.