What Is a Graded Benefit Whole Life Policy?

Graded benefit whole life insurance is a type of permanent life insurance. Permanent policies like whole life and graded premium whole life are designed to remain in force until the day you die. This differs from a term life policy that ends after a specific time, such as after 10, 20, or 30 years. The difference between a traditional whole life policy and a graded benefit life policy is the latter has a waiting period before full benefits are paid. There are two types of graded benefit policies: simplified issue and guaranteed issue.

Key Takeaways

  • Graded benefit whole life policies come in two forms: simplified issue and guaranteed issue. 
  • Simplified issue policies have limited questions and no required exam, but you can be turned down.
  • Guaranteed issue policies have no medical questions and no exams. 
  • Premiums for graded benefit policies are higher than traditionally medically underwritten plans. 
  • Death benefits on graded benefit policies are typically lower than traditional medically underwritten plans. 
  • There is a waiting period of 2 to 3 years before the policy will pay in full for natural causes of death.

Simplified Issue vs. Guaranteed Issue

Guaranteed issue life insurance does not require medical questions or a medical exam for approval. Simplified issue life insurance requires you to answer minimal questions about your health. Still, you could be denied if you have a critical illness or reside in an assisted living facility.

Simplified Issue

  • Short application with only a few questions and no medical exam
  • Offers higher benefit amounts than final expense policies
  • A short health questionnaire provides insurance companies with enough information about the person’s health to set a premium
  • Quick policy issuance

Guaranteed Issue

  • Easy to apply and receive coverage
  • No medical questions
  • No exam is required
  • Higher premiums than other plans
  • Lower benefit amounts compared to other plans

How Does the Waiting Period Work?

Insurance companies mandate a waiting period of typically 2 to 3 years because they do not know the applicant’s health. This prevents them from going out of business. The higher premiums reflect the higher risk the company takes on compared to other fully underwritten plans and carry a lower premium. This waiting period is for natural causes of death. If an insured person dies as the result of an accident, the waiting period does not apply.

For example, an insured person is issued a $25,000 guaranteed life insurance policy with an effective date of January 1st, 2021, and a two-year waiting period.

  • Suppose the insured person dies of a heart attack on December 31st, 2021, and no death benefit is paid out. Instead, the beneficiaries will receive a return of the premiums paid.
  • If the insured person dies due to a car accident on March 15th, 2022, the full $25,000 death benefit will be paid to their beneficiaries.
  • If the insured person dies of cancer on January 2nd, 2023, the entire $25,000 will be paid to their beneficiaries, as the waiting period will be over.

Who Should Get a Graded Benefit Whole Life Policy?

The following people may want to consider getting graded benefit whole life insurance:

  • Seniors
  • Those with pre-existing health conditions who are ineligible for traditional life insurance
  • Those who do not want to go through a formal exam
  • Those who need more benefits than a final expense policy provides

Benefits of a Graded Benefit Whole Life Insurance

  • Permanent and level protection with a tax-free death benefit
  • Premiums do not increase and are guaranteed if you maintain your policy
  • If you die of natural causes during the policy waiting period, your beneficiaries receive all the premiums paid, plus interest
  • If you die because of an accident during the waiting period, your beneficiaries receive the full death benefit
  • The total death benefit is paid in full for any cause of death after the waiting period expires
  • They are typically available to those 40-85 years of age
  • Typical death benefit amounts are $2,000 to $25,000
  • No medical exam is required

Planning for the Future

Taking out a graded benefit whole life insurance helps you plan ahead by ensuring that the period’s benefits will be provided after the waiting period to help with final expenses.

Consistent Premiums 

One of the benefits of graded benefit whole life insurance is the premiums are guaranteed to remain level. In other words, they do not increase with age.

No Medical Exam Needed

There is a medical exam required with graded benefit whole life insurance. This makes it a good choice for those who have been declined coverage for other types of life insurance that are medically underwritten. It is also a good choice for those who do not like going through a medical exam, including providing blood samples to be analyzed.

Full Death Benefit After Waiting Period

100% of the policy death benefit is paid in full after the waiting period, which is typically 2 to 3 years.

Downsides of Graded Benefit Life Insurance

  • The premiums are higher than traditional permanent life insurance policies
  • Beneficiaries do not receive the full policy death benefit until after a typically 2 to 3-year waiting period
  • Lower benefit amounts compared to traditional permanent plans

Premiums Can Be Higher

Graded Benefit policy premiums are more costly than traditional fully underwritten whole life insurance plans. The reason is that the insurance company does not know your health history, so they must price the policy higher than they do for those who are medically underwritten.

You Only Get the Full Benefit After the Waiting Period

You only receive the full benefit for natural causes of death after the waiting period. If you die of natural causes before the end of the waiting period, your beneficiaries receive the premiums paid to date plus interest. Complete policy benefits are paid at any time for deaths caused by accidents.

Where Can I Get Graded Benefit Whole Life Insurance?

Graded benefit whole life insurance can be purchased through a local agent, online, or by mail.