When you buy life insurance from a life insurance company, what exactly are you buying?
You’re buying a lump sum of cash that will be delivered to you in the future, right?
But not at a known date and time in the future. (Some companies sell payouts with a specific delivery date, but those payouts go by different names, like “savings bonds” or “CDs.”)
For insurance to work, the timing of the payout has to be unknown to both parties.
As we’ll explain below, this is exactly why graded benefit life insurance policies exist.
How A Graded Death Benefit Works
So, what is a graded life insurance policy all about?
Most people are familiar with the phrase “death benefit,” — referring to a benefit payment made upon death. But what is graded death benefit?
When you hear the word “grade,” you probably think of grade school or getting a good grade on a test.
But the word “graded” here means “tiered” or “having a series of steps.” And this tells you everything you need to know about how graded death benefits work.
A graded death benefit is simply a payout that comes in more than one tier. A smaller tier(s) first before reaching its full amount.
Level Death Benefit (Full Death Benefit) Policies
The opposite of this is a traditional life insurance policy with a payout that is “flat” or “level.” What is a level death benefit, and how it’s different?
With “Level Benefit” policies, the full benefit is paid from Day 1.
What Is A Waiting Period?
It’s hopefully now much easier to understand what a “waiting period” is.
It’s simply the period of time (usually the first two or three years) before a policy reaches the full payout level.
If the insured dies during the waiting period (graded period), one of two things will happen:
- If the insured dies of natural causes, then the life insurance company refunds the premiums they paid (with 5-10% interest, typically)
- If, however, the insured dies an accidental death, the beneficiaries of the policy receive 100% of the face amount
Finally, after the (typically) two-year waiting period, the life insurance company will pay the beneficiaries the full death benefit, regardless of the cause.
Why Have A Graded Death Benefit Life Insurance Policy?
While consumers often feel cheated by graded life insurance policies, this couldn’t be further from the truth.
Insurers would have to deny coverage to fewer people without graded death benefits.
Either that or they would have to subject higher-risk customers to levels of medical scrutiny and medical history reviews so they could understand these customers’ life expectancies well enough to offer them coverage.
The worst outcome for an insurance company is having to make a large payout before they’ve received anything “paid in” by the customer. A graded benefit period allows life insurance companies to have breathing room.
By not worrying about making a full payout during the first few years (policy years), they can ultimately offer coverage to far more people than a traditional policy (premium graded whole life insurance).
Guaranteed Issue Life Insurance and Simplified Issue Underwriting
Customers have made it loud and clear over the years that they do NOT want their privacy invaded, nor do they want to endure the discomfort of a medical exam.
They strongly prefer Simplified Underwriting — a quicker application process that does its medical underwriting through health questions (not exams) and instantly available prescription drug reports.
While people grumble about waiting periods, they would be grumbling FAR more about the level of medical underwriting they would have to go through without graded benefit coverage options!
Why Buy Graded Benefit Whole Life Insurance
As we began discussing above, there are two benefits of graded policies that make them attractive to specific individuals.
They Make Coverage Available To Higher-Risk Individuals
What does graded death benefit mean?
Most notably, a graded whole life policy works well for people with below-average health but still want to ensure their loved ones are cared for financially when they pass.
Under a graded premium whole life policy, there’s an ability to buy a guaranteed life insurance that makes coverage available to people whose health conditions would ordinarily make it challenging to qualify for life insurance coverage.
The “return of premium” refund aspect of the waiting period makes it safer to get life insurance the worse your health is.
Without this feature, if the policyholder had a remote chance of dying during the waiting period, they might shy away from it for fear of putting their family in even worse shape than they were in the first place!
No Medical Exams (Or Medical Questions)
Life insurance policies require medical checks that prevent many from purchasing life insurance coverage.
Being able to “tier” the benefits they pay out allows them to “give” to consumers in the areas they value. Over time, insurers will experiment with and settle on different trade-offs between protection/price vs. process simplicity.
Ultimately, this gives consumers more options and likely expands the proportion of people with some life insurance protection.
Graded Premium Life Insurance Policy Examples
The table below shows examples of a graded premium whole life policy from Mutual of Omaha, American Amicable, and Prosperity Life Insurance.
|Policy||Graded Death Benefit Details|
|Year 1: 30% of death benefit||Year 1: Return of premium + 10%|
|Year 2: 70% of death benefit||Year 2: Return of premium + 10%|
|Years 3+: 100% of death benefit||Years 3+: 100% of death benefit|
|Year 1: 110% of premiums paid||Year 2: 231% of premiums paid|
|Years 3+: 100% of death benefit|
Graded Benefit Policy FAQs
What happens if death occurs during the first two years of a graded policy?
If the insured dies during a policy’s graded period, nearly all policies refund the premiums paid to that point, with interest. As is always the case, any outstanding loan balance or unpaid premiums may reduce the death benefit.
How long is the graded benefit period?
The waiting period for a graded life policy and a guaranteed issue policy is almost always two years. Some insurers (like Liberty Bankers) have a three-year waiting period while others (like Prosperity Life) have a true “tiered” payout (e.g., 30% of the face amount paid for Year 1 deaths, 70% for Year 2, and 100% after that.
What is the difference between level benefits and graded benefits?
With a level death benefit insurance policy, the life insurance company pays the policy’s full death benefit from Day 1, whether the death resulted from an accident or natural causes. Graded policies, conversely, have a waiting period before the insurance company will pay out the face amount.
We hope this answers your questions about graded death benefits in life insurance policies!
If you have any questions, please don’t hesitate to email us or leave a comment.
The GetSure Team