What Is Graded Life Insurance?

Graded life insurance refers to a type of life insurance policy where beneficiaries receive partial benefits if the policyholder passes away within two or three years after purchasing the policy. The amount of partial benefits depends on how long ago the policy was bought and varies across insurance companies. Here are some examples of how graded death benefits work:

SituationBeneficiary Payout
Death from an accidentFull amount of coverage regardless of when the accident occurs
Death after the time limit for graded death benefit has passedFull coverage amount of the life insurance policy

Graded death benefits are not typically found in standard term or whole life insurance policies. These policies usually pay out the full amount of the death benefit, excluding suicide in the first couple of years of the policy. Graded death benefits are usually part of guaranteed issue life insurance policies, which are designed for individuals who cannot qualify for traditional life insurance due to their health. Guaranteed issue policies are also suitable for those who want to leave a small amount of money to pay for burial expenses or cover small debts or medical bills. However, it’s important to note that guaranteed issue policies are expensive and could be two to three times the cost of traditional life insurance policies.

The main advantage of guaranteed issue life insurance is that individuals can qualify for a policy regardless of their health, and there is no medical exam. However, the application process is quick and convenient. The main disadvantage is the price and limited payouts available, which may not exceed $25,000. Graded death benefits are another disadvantage because they reduce risk for the insurance company. If severely ill people buy policies and pass away within two or three years, the insurance company won’t have to pay the full death benefit to beneficiaries. Rates for guaranteed issue life insurance policies are based on the applicant’s age and gender.

Before purchasing a guaranteed issue life insurance policy, it’s essential to understand how much life insurance coverage you need. Once you know the amount you require, you can begin shopping around for life insurance policies from different companies. Some companies offer guaranteed issue life policies with graded death benefits, including:

  • Colonial Penn
  • AARP
  • MetLife

While guaranteed issue life insurance has its place, it’s essential to work with a life insurance agent who can try to get you multiple quotes for traditional life insurance first.

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