What Is A Graded Death Benefit Life Insurance Policy? [2022]
- Rikin Shah | Licensed Life & Health Insurance Agent
- Fact-Checked (see our Editorial Guidelines)
- Updated: January 15, 2023
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.
And as we’ll explain below, this is exactly why graded death benefit policies exist.
How A Graded Death Benefit Works
Most people are familiar with the phrase “death benefit,” — referring to a benefit payment made upon death. But what is a 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.”
With “Level Benefit” policies, the full benefit is paid out 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 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 of death.
Why Have A Graded Death Benefit Life Insurance Policy?
While consumers often feel cheated by graded death benefits, this couldn’t be further from the truth.
Insurers would have to deny coverage to far more 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 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
Most notably, graded death benefits work well for people with below-average health but still want to ensure their loved ones are cared for financially when they pass.
The ability to buy a guaranteed life insurance policy 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 graded death benefit whole life insurance policies from Mutual of Omaha, American Amicable, and Prosperity Life Insurance.
Graded Benefit Policy FAQs
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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, the death benefit may be reduced by any outstanding loan balance or unpaid premiums.
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How long is the graded benefit period?
The waiting period for graded death benefit and guaranteed issue policies 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% thereafter.
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What is the difference between level benefits and graded benefits?
With a level death benefit policy, the life insurance company pays the policy’s full death benefit from Day 1, no matter whether the death resulted from an accident or from natural causes. Graded policies, on the other hand, have a waiting period before the insurance company will pay out the face amount.
Conclusion
We hope this answered your questions about graded death benefit life insurance policies!
If you have any questions, please don’t hesitate to email us or leave a comment.
Warm Regards,
The GetSure Team
Burial Insurance
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