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What Is Graded Death Benefit Life Insurance?

Person looking through life insurance documents

A graded death benefit policy is a type of whole life insurance policy with a waiting period. It may be an option for people who are unable to be approved for standard life insurance. There is no medical exam required. People who have been declined for life insurance from all other companies can still get coverage through a graded benefit life insurance plan.

How Does Graded Death Benefit Life Insurance Work?

Graded death benefit policies have four basic features to be aware of:

  • The full benefit is not paid out until after a two to three-year waiting period. If unexpected death occurs during the first two years, your beneficiaries will receive a tax-free benefit, but not for the full amount. There are two payment possibilities in this case: return of your premiums during the first two years, plus interest; or a percentage of the death benefit.
  • The payment during the waiting period is either graded or return of premium plus interest. A graded policy is the best option, because it means that a percentage of the death benefit is paid out during the two-year waiting period, if anything should happen to you. With return of premium plus interest, you are refunded your premiums plus interest at a set rate, typically 10 percent. Your beneficiaries will receive more with a graded policy.
  • Rates are higher than for standard life insurance. As this is a high-risk policy, it comes at a higher cost. However, the rates are guaranteed for the rest of your life, and the policy will build up cash value.
  • There are some health questions. Although acceptance is not guaranteed (unless you choose a more expensive guaranteed life insurance option) most people will qualify for graded death benefit life insurance. This includes people who have suffered heart conditions, cancer, and even stroke, provided that two years have passed since it occurred. Every insurance company has different health questions. Our knowledgeable agent can help place you in the least costly plan for your situation.

Why Do Life Insurance Carriers Have A Graded Benefit Period?

Insurance companies are in the business of risk for profit. Guaranteed issue life insurance policies that require no medical exam and are issued to people with serious health problems expose insurance companies to the possibility of financial loss. The graded benefit period of 24 to 36 months helps protect carriers from the risk involved in issuing policies to people with serious medical conditions that create a higher risk of death within the first few years after the policy is issued.

How Do Graded Death Benefits Policies Differ From Standard Life Insurance Policies?

A graded death benefit life insurance policy pays a lower amount if death occurs during the first few years after you purchase the policy. Unlike standard life insurance, the death benefit is only increased to the stated face amount after the policy has been in effect for two to three years. Graded death benefit life insurance is usually only purchased as a last resort by people with major health problems who cannot otherwise obtain life insurance. It is more expensive than standard life insurance, but easier to obtain and could be an option for you. Our agency is here to help you find the best option.