What Is Graded Life Insurance?

In the realm of life insurance, graded benefit life insurance stands out as a unique option. It's designed for persons whose health conditions or lifestyle risks present challenges to securing traditional life insurance coverage. This type of insurance offers a potential solution: by providing coverage at a lower premium with a death benefit that gradually increases over time.

Consider the potential benefits of graded life coverage, as well as the drawbacks, as you weigh whether this unique life insurance may be right for you and your beneficiaries.

Understanding Graded Life Insurance

Graded life insurance, also known as graded death benefit life insurance, is a type of life insurance protection. In the initial years of the policy it provides a lower death benefit, then over time gradually increases to the full death benefit. This type of insurance addresses the protection needs of people whose health conditions or lifestyle risks make them ineligible for traditional life insurance coverage.

How Does a Graded Death Benefit in Life Insurance Work?

Some life insurance policies, especially those designed for individuals with health issues or higher risk profiles, may have a graded death benefit. As such, the full death benefit is not immediately payable if the insured person dies shortly after the policy is issued. Instead, the insurance company might pay out a lesser percentage of the death benefit during the policy's initial years. The policy's full benefit then becomes payable after a certain waiting or "graded" period.

The policy will also have a "graded premium" associated with it. That means the premiums increase over time, typically at predetermined intervals. The lower premiums gradually rise at specific points in the policy's term.

How Is a Graded Death Premium Modified?

A graded death benefit is modified in two ways:

1. The death benefit increases: As the policy ages, the graded death benefit increases each year. The increases continue until reaching the full death benefit amount after a specified period (typically three to five years).
2. The death benefit is based on the percentage of premiums paid: The insurance company will pay the percentage of the death benefit equal to the percentage of the premiums paid. For example, if the insured dies during the first year of the policy and has paid 25% of the premiums, the beneficiaries will receive 25% of the full death benefit.

What Is the Graded Benefit Waiting Period?

The graded benefit waiting period on graded life insurance is the period of time during which the death benefit is lower than the full death benefit. This period typically lasts for two or three years. But it can vary depending on the insurance company and the specific policy.

Once the graded benefit waiting period is over, the death benefit increases to the full protection amount. So if the insured dies after the graded benefit waiting period is over, the beneficiaries will receive the full death benefit.

The graded benefit waiting period reduces the risk to the insurance company. It ensures the insurer doesn't have to pay out the full death benefit if the insured dies shortly after the policy is issued. This makes sense. People with health conditions or lifestyle risks are more likely to die within the first few years of a policy being issued.

How Are Graded Death Benefits Paid?

With graded life, the death benefit typically starts at 25% to 50% of the full death benefit. It then increases by increments of 10% to 25% each year until it reaches the full death benefit after three to five years. This means that if the insured dies during the graded period, their beneficiaries will receive a portion of the full death benefit, rather than the entire amount.

During the graded benefit waiting period, the death benefit is typically a reduced percentage of the full death benefit. If the insured dies during the graded benefit waiting period, the beneficiaries will receive the percentage of the full death benefit in effect at that time. For example, the death benefit might start at 50% of the full death benefit and increase by 10% each year until it reaches the full death benefit after five years.

What Types of Life Insurance Policies Offer a Graded Death Benefit?

Some of the most common types of life insurance policies that offer a graded death benefit include:

• Term life insurance: This provides coverage for a specific period of time, typically 10, 20 or 30 years. Graded death benefit term life insurance policies typically have a shorter graded period than graded death benefit whole life insurance policies.
• Whole life insurance: This provides coverage for the insured's entire lifetime. Graded death benefit whole life insurance policies typically have a longer graded period than graded death benefit term life insurance policies.
• Universal life insurance: This is a type of flexible life insurance that combines elements of term life insurance and whole life insurance. Graded death benefit universal life insurance policies typically have a graded period similar to that of graded death benefit whole life insurance policies.

Graded Life Insurance vs. Traditional Life Insurance

The main differences between graded life and traditional life insurance are centered around who they are designed for, the death benefit payouts, the underwriting and the costs:

• Eligibility: Graded life is typically available to people with health conditions or lifestyle risks, whereas traditional life insurance is typically available to people with average to excellent health.
• Death benefit: Graded life coverage will have a lower death benefit during the graded period, gradually increasing to the full death benefit over time. For traditional life insurance, beneficiaries receive the full benefit, no matter when the insured dies.
• Underwriting: Graded life has streamlined underwriting, and often no medical exam is required. Traditional life insurance has more stringent underwriting and a medical exam may be required.
• Costs: Graded life coverage is more expensive than traditional life insurance and payouts are limited.

Who Should Consider Buying Graded Premium Whole Life Insurance?

Graded premium whole life insurance is a type of life insurance that offers a lower death benefit during the initial years of the policy and gradually increases to the full death benefit over time. This type of insurance is designed for people who have health conditions or lifestyle risks that make them ineligible for traditional life insurance policies.

Here are some of the people who may want to consider buying graded premium whole life insurance:

• People with health conditions: If you have a health condition, such as heart disease, cancer or diabetes, you may find that traditional life insurance is too expensive or that you are not eligible for coverage. Graded premium whole life insurance can be a good option for people with health conditions because it offers guaranteed coverage, even for people with risk factors.
• People with lifestyle risks: If you have a lifestyle risk, you may find that traditional life insurance is too expensive or that you are not eligible for coverage. Graded premium whole life insurance may be a good option because it is typically less expensive than traditional life insurance.
• People who want to start building a life insurance policy but cannot afford the cost of traditional life insurance: If you cannot afford the cost of traditional life insurance, graded premium whole life insurance may be a good option for you. This is because the premiums are typically lower than the premiums for traditional life insurance.
• People who want some financial protection in place, even if the death benefit is not yet the full amount: If you are concerned about providing some financial protection for your loved ones, even if the death benefit is not yet the full amount, graded premium whole life insurance may be a good option. Moreover, over time the protection will gradually increase to the full death benefit amount.

What Are Benefits of Graded Benefit Life Insurance?

There are several potential benefits to graded life coverage, including:

• Affordability: Graded life is typically less expensive than traditional life insurance, making it a more affordable option for people with health conditions or lifestyle risks.
• Guaranteed coverage: Graded life offers guaranteed coverage, even for people with risk factors that might make them ineligible for traditional life insurance.
• Financial well-being: Graded benefit life coverage provides a measure of confidence to policyholders and their families, knowing some financial protection in place, even if the death benefit is not yet the full amount.

Some additional potential advantages of graded benefit life insurance are:

• Flexibility: Graded life policies typically offer more flexibility than traditional life insurance policies, allowing policyholders to change their coverage amount or payment schedule as their needs change.
• No medical exam required: Graded life insurance policies typically do not require a medical exam, making the application process simpler and quicker.
• Immediate coverage: Graded life insurance policies typically provide immediate coverage. The death benefit is at least partially payable immediately upon the policyholder's death, even during the graded period.

What Are Potential Drawbacks of Graded Life Insurance?

Despite its advantages, graded life coverage also has some potential drawbacks that you should be aware of before considering this type of insurance:

• Lower death benefit: During the graded period, the death benefit is lower than the full death benefit. This means that if the insured dies during this time, their beneficiaries will receive less money than they would if the insured had a traditional life insurance policy. For example, in some policies, the death benefit may start at 50% of the full death benefit and increase by 10% each year until it reaches the full death benefit after five years.
• Limited flexibility: Graded life policies typically have fewer options and riders than traditional life insurance policies. For example, they may not offer the same options for waiver of premium or term conversion.
• Higher premiums in the long run: While graded life premiums are typically lower than traditional life insurance premiums in the early years, they may be higher in the long run once the death benefit reaches its full amount.
• Potential for exclusions: As with most life insurance, graded life policies may have exclusions for certain causes of death, such as suicide or death from accidents that occur within a certain period of time after the policy is issued.