What is a Graded Death Benefit?
A graded death benefit is a feature of specific permanent life insurance policies. These policies dictate that if the insured dies within the waiting period, the beneficiaries receive a portion of the policy’s full death benefit — and that portion increases over time. These types of policies are called graded life insurance.
How a graded death benefit works
Graded death benefits often apply to life insurance policies with a waiting period, like guaranteed issue or simplified issue life insurance.
Without a graded death benefit, these policies specify that if the insured dies within the waiting period (e.g., the first two years after the policy is purchased), the life insurance company doesn’t have to pay out any death benefit.
With a graded death benefit, though, the policy’s beneficiaries still receive something (albeit a much smaller amount than the full death benefit) if the insured dies during the waiting period.
The graded death benefit usually applies for the first two or three years and operates on a schedule that increases over time. For example, if the insured dies within the first year of coverage, their beneficiaries might get something like 10% of the policy benefit. If they die within the second year of coverage, the beneficiaries will get a larger percentage of the death benefit.
Most graded death benefits time out after two or three years. After that point, the beneficiaries are eligible to receive the full benefit when the insured passes away.
Who chooses life insurance with a graded death benefit
Graded life insurance is generally a fit for people who want life insurance but wouldn’t qualify for a traditional medically underwritten policy. If you’re over a certain age or you have a health condition that has caused a life insurance provider to deny coverage, you can explore graded death benefit policies.
When applying for these policies, individuals may need to answer a series of medical questions but they won’t need to go in for a full-fledged medical exam. That means you could potentially get this type of life insurance even with a serious health concern in your past, like cancer or severe diabetes.
Because the underwriting process is streamlined with graded life insurance, it costs more than traditional life insurance. Once you purchase this coverage, the premiums remain fixed for life, regardless of any new health conditions or a worsening of an existing health condition.
The specifics of graded death benefits
Different insurance companies handle graded life insurance differently. Some companies, for example, will only grade the death benefit if the insured dies from a medical condition. If they die accidentally (like in car insurance), their beneficiaries may be entitled to the full death benefit even if they’re still within the waiting period.
Additionally, different insurers grade death benefits in different ways. Some insurance providers grade them as a specific percentage of the death benefit that increases over the years. Others specify that during the graded period, the beneficiaries get money amounting to all the premiums that have been paid toward the policy, plus a specific rate of interest on that amount. Some insurers blend the two, issuing a return-of-premium plus interest for the early portion of the graded period, then issuing a percentage of the death benefit for the later portion of the period.
Because graded life insurance operates differently from insurer to insurer, people who don’t qualify for other types of life insurance should review coverage options from multiple providers before choosing a policy.