Paying for a Spendthrift Clause in Life Insurance: Options and Considerations

What Is a Spendthrift Clause?

A spendthrift clause is a rider attached to a life insurance policy that protects the death benefit from creditors of the insured. It requires a separate premium payment, which can be added to the base policy or purchased as a stand‑alone rider.

How to Pay for the Clause

1. Premium Add‑On

Most insurers offer the spendthrift rider as an add‑on to the existing policy. The rider premium is typically a percentage of the death benefit—often 0.5% to 1.5% annually. Paying the rider premium alongside the regular policy premium keeps the rider in force as long as the main policy is active.

2. Stand‑Alone Policy

Some providers allow the spendthrift clause to be purchased as a separate policy that references the primary policy's death benefit. This option can be useful if the insured wishes to avoid increasing the main policy's premium, but it usually comes with a higher cost and requires a separate underwriting process.

3. Lump‑Sum Purchase

A few insurers permit a one‑time payment that covers the rider for a set number of years or the life of the policy. This can be advantageous for retirees who want to lock in the protection without ongoing premiums.

4. Financing the Rider

While less common, some insurers allow the rider premium to be financed through the policy itself, similar to a policy loan. The cost of borrowing is added to the policy's cash value, and repayment is tied to the policy's performance.

Choosing the Right Payment Method

Deciding how to pay depends on the insured's financial goals, liquidity, and risk tolerance. Adding the rider to the regular premium is the simplest and most common approach, ensuring continuous protection without extra administrative steps. If the insured prefers to keep the base premium low, a stand‑alone policy or lump‑sum option may be more suitable, though they often carry higher overall costs.

Key Takeaways

• Spendthrift riders protect death benefits from creditors.
• Common payment methods include premium add‑ons, stand‑alone policies, lump‑sum purchases, and policy‑based financing.
• Cost varies by insurer, rider type, and death benefit amount.
• Choosing the payment strategy should align with overall financial planning objectives.