What Is a DOT Insurance Rider?

Life insurance is an important purchase, but there are so many options that it can also be one of the most confusing investments you make. A good insurance agent can help you sort out which type of insurance you need, such as term or whole life. In addition, there are also different riders, or "extras," you can purchase with your insurance coverage. One example is the the Dividend Option Term (DOT) rider.

To understand the advantage of a DOT rider, you must understand the two main types of insurance: term or whole life. Term insurance is valid for the time period you select, such as 10 years. You will pay the same premium during that period but must renew when the term expires, often at a higher rate. You will usually have to repeat your physical and risk having your coverage canceled if you have developed a serious illness since you last subscribed. With whole life insurance, you pay the same premium until you cancel the policy or die. It can usually only be canceled for nonpayment. Whole life is typically more expensive but is guaranteed coverage.

A DOT rider is typically added to term life insurance and is used to increase the amount of death benefits without raising the premiums. A DOT rider is usually only available to add to a policy that gives dividends to subscribers. A dividend is a portion of the premium you pay that is refunded to you. You have several ways to receive the dividend, including as an annual check or as a credit to your policy premium.

One way you can receive your dividends is with a DOT rider, which is a good option to extend your death benefits without an increase in premiums. A DOT rider is used to gradually convert more of your term life policy to a whole life policy as the years pass. Many insurers, such as New York Life, combine a DOT rider with "paid-up additions," in which dividends are reinvested into the policy to increase the amount of whole life coverage while automatically reducing the DOT rider's value. "Paid-up additions" can't be canceled. Once paid for, you own them, even if your other coverage lapses or is canceled. Used together, the "paid-up additions" and the DOT rider gradually increases a subscriber's guaranteed permanent coverage without raising the premiums.

The process described typically works slowly, but you can accelerate the process by also adding an Option to Purchase Paid-Up Additions (OPP) rider to your policy, which actively increases the amount of term life converted to whole life, leading to more guaranteed coverage at a quicker pace. The option costs more because you are making extra payments above the premiums at a set schedule -- such as an additional $100 every two years -- but is a good investment, particularly for clients who are older or in poor health. It helps build whole life coverage more quickly while keeping your death benefit coverage amount consistent.