Most life insurance policies have a straight-forward payout: Your beneficiaries are paid the full death benefit. But if you have a life insurance policy with a “graded death benefit,” your beneficiaries won’t get paid the full death benefit if you die from illness or disease within the first few years after buying the policy.
Life insurance policies that don’t require a medical exam or ask for very little medical information during the application process, such as guaranteed issue life insurance, commonly have graded death benefits.
You can’t be turned down for a guaranteed issue life insurance policy, so it can be a good fit if you’re in very poor health and wouldn’t qualify for other life insurance, but be aware of how a graded death benefit works.
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How Are Graded Death Benefits Paid?
If you have life insurance with a graded death benefit, and you pass away within two or three years after buying the policy, your beneficiaries will receive partial benefits, dictated by how long ago you bought the policy. The structure of graded death benefits varies by insurance company.
Here are some examples of how it might work:
- If you pass away after the first or second year of owning the policy, it might pay the beneficiary a refund of premiums paid, plus interest. How much interest is paid varies, but can be 10% the first year and 20% in the second year. In the third year and after, it might pay 100% of the death benefit if you die.
If you die in an accident, such as a car crash, a life insurance policy with a graded death benefit would pay the full amount of coverage regardless of when the accident occurs.
Once you pass the time limit for a graded death benefit, your beneficiaries will receive the full coverage amount of the life insurance policy.
Graded death benefits are not found in standard term life insurance and whole life insurance policies. These types of life insurance generally pay out the full amount of the death benefit, regardless of when you pass away (usually excluding suicide in the first couple years of the policy).
Is Life Insurance with a Graded Death Benefit Right for You?
Graded death benefits are usually part of guaranteed issue life insurance policies. If you cannot qualify for a traditional life insurance policy because of your health, you may be looking at a guaranteed issue policy.
You might also be considering a guaranteed life insurance policy if you want to leave a small amount of money to pay for burial expenses, cover small debts or pay medical bills.
It’s important to note that you usually have to meet certain age requirements to apply for a guaranteed life insurance policy. Many insurance companies that offer these policies won’t sell new policies to you after age 80, and have a minimum purchase age between 40 and 55.
Pros and Cons of Guaranteed Issue Life Insurance
The key advantages of a guaranteed issue life insurance policy are that you can qualify for a policy regardless of your health, there is no medical exam and the application process is super quick and convenient.
A big disadvantage is the price. Guaranteed issue life insurance is among the most expensive kinds of life insurance. There are also limited payouts available, sometimes no more than $25,000. Graded death benefits are another disadvantage.
Guaranteed Issue Life Insurance Cost
Guaranteed issue life insurance policies are expensive, and could be two to three times the cost of traditional life insurance. Why are they so pricey? The insurance company is taking a risk issuing a life insurance policy without knowing anything about your health.
The graded death benefit reduces 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.
Life Insurance Companies with Graded Death Benefit Policies
The first step to buying a policy is deciding how much life insurance you need. For instance, if you’re buying a policy to pay for burial expenses and a credit card balance, get the coverage amount that equals these costs.
Once you know the amount that you want, you can begin shopping around for life insurance policies from different companies. Here are some examples:
- AIG Direct has a Guaranteed Whole Life insurance policy that is guaranteed for applicants age 50 to 80. Coverage amounts range from $5,000 to $25,000. If the person dies of natural causes within the first two years of the policy, a graded death benefit ranging from 110% to 120% of premiums will be paid. The full benefit is paid in the third year and afterwards.
- Bankers Life’s BasicLife Graded Benefit policy has a graded death benefit for the first two years. For year one, the benefit is 110% of the first year’s annual premium, excluding a policy fee. For year two, the benefit is 120% of the first two years’ annual premium, minus a policy fee. In following years, the policy pays out 100% of the death benefit.
- Fidelity Life’s RAPIDecision Guaranteed Issue Life Plan allows you to buy $25,000 in coverage when you are age 50 and 85. There is a graded death benefit in policy years one through three, with full death benefits in year four and after.
- Gerber Life offers a Guaranteed Life Insurance policy for people ages 50 and 80 with coverage options ranging from $5,000 to $25,000. A graded death benefit applies in the first two years of the policy. If a death for any reason other than an accident occurs, premiums plus 10% interest will be paid to the beneficiary.
Other companies with guaranteed issue life policies with graded death benefits include:
- AAA Life Insurance
- AARP
- Alfa Insurance
- Colonial Penn
- Mutual of Omaha
- Vantis life
Guaranteed issue life insurance has its place, but don’t assume you can’t qualify for a more traditional policy. Work with a life insurance agent who can try to get you multiple quotes for traditional life insurance first.
