Graded Benefit Whole Life Insurance: What It Is And Who Should Buy It

 

Life insurance is a crucial financial tool that can protect your loved ones from the unexpected. But getting life insurance can be challenging if you have health issues or are older that might make you ineligible for other types of life insurance.

Fortunately, there is a type of life insurance that can provide coverage for people who cannot qualify for other types of life insurance due to health issues or age. It is called graded benefit whole life insurance, and it can be a viable option for some people who need a small amount of coverage.

But graded benefit whole life insurance is not for everyone. It has some drawbacks that you should be aware of before you buy it. In this article, we will explain what graded benefit whole life insurance is, how it works, who should buy it, and how to shop for it.

How Graded Benefit Whole Life Insurance Works

Graded benefit whole life insurance is a type of permanent life insurance that does not pay the full death benefit for the first two or three years, unless the death is accidental. In other words, a graded death benefit is a waiting period for those with significant risk factors that make traditional life insurance policies with immediate coverage unattainable.

Graded benefit whole life insurance has some features and benefits that are similar to other types of permanent life insurance, such as:

• Lifetime coverage: Graded benefit whole life insurance provides coverage for your entire life as long as you pay the premiums. Unlike term life insurance, which only provides coverage for a specific period of time (such as 10, 20 or 30 years), graded benefit whole life insurance does not expire or need to be renewed.
• Fixed premiums: Graded benefit whole life insurance has fixed premiums, meaning the amount you pay every month won’t change. Unlike other types of permanent life insurance, such as universal life insurance or variable universal life insurance, which have flexible premiums that can vary depending on your cash value performance or market conditions, graded benefit whole life insurance has predictable and stable premiums that are easier to budget for.
• Cash value: Graded benefit whole life insurance has a cash value component that grows over time and can be used for loans or withdrawals. The cash value of a graded benefit whole life policy typically earns a fixed rate of interest that is guaranteed by the insurer. You can access your cash value by taking out a loan or making a withdrawal from your policy. However, loans and withdrawals will reduce your cash value and your death benefit, and may incur fees or taxes.
• Tax advantages: Graded benefit whole life insurance has some tax advantages that can benefit you and your beneficiaries. The cash value grows on a tax-deferred basis, meaning you do not pay taxes on the interest until you withdraw it. The death benefit is generally paid out tax-free to your beneficiaries, unless it exceeds the federal estate tax exemption limit.

The main difference between graded benefit whole life insurance and other types of permanent life insurance is how the death benefit works. The death benefit is the amount of money that your beneficiaries will receive when you die.

With graded benefit whole life insurance, the death benefit is not paid in full for the first two or three years of the policy, unless the death is accidental. Instead, it pays a percentage of the death benefit or a refund of premiums plus interest in the first two or three years.

The percentage of the death benefit or the interest rate varies depending on the insurer and the policy type, but here are some examples of how it might work:

• If you die in the first year of owning the policy, it might pay 30% of the death benefit or a refund of premiums plus 10% interest.
• If you die in the second year of owning the policy, it might pay 60% of the death benefit or a refund of premiums plus 20% interest.
• If you die in the third year of owning the policy or after that, it might pay 100% of the death benefit.
• If you die in an accident at any time during the policy term, it might pay 100% of the death benefit.

The reason for this graded death benefit is to reduce the risk for the insurer and to prevent adverse selection. Adverse selection is when people who are more likely to die soon buy life insurance and make the insurer pay out more than they collect in premiums.

By having a graded death benefit, the insurer can offer coverage to people who have health issues or are older that might otherwise be rejected or charged a higher rate for other types of life insurance. The graded death benefit also discourages people who are terminally ill or have a short life expectancy from buying the policy and making the insurer pay out more than they collect in premiums.

Who Should Buy Graded Benefit Whole Life Insurance

Graded benefit whole life insurance can be a good option for some people who need a small amount of coverage and who cannot qualify for other types of life insurance due to health issues or age. But it is not suitable for everyone. Here are some scenarios where graded benefit whole life insurance might be appropriate:

• You have serious health conditions that might disqualify you from traditional life insurance or make you pay a higher rate. Graded benefit whole life insurance can be easier to qualify for than other types of life insurance that require a medical exam or use accelerated underwriting. If you have health issues such as diabetes, high blood pressure, obesity, or a history of cancer, heart disease, or stroke, you might be able to get graded benefit whole life insurance at a lower rate than full medical underwriting. But you still have to answer some health questions and disclose any major health problems or risky hobbies.
• You are 50 years old or older and have delayed getting life insurance. Graded benefit whole life insurance can be a convenient way to get life insurance coverage later in life when you might have more health issues or less time to go through the underwriting process. If you are 50 years old or older and do not have any life insurance or enough life insurance, graded benefit whole life insurance can help you secure some coverage for your family or beneficiaries. But you should be aware that graded benefit whole life insurance gets more expensive as you age and might not offer enough coverage for your needs.
• You need a small amount of coverage for a specific purpose, such as final expenses, debt repayment, or income replacement. Graded benefit whole life insurance can provide enough coverage to cover your funeral costs, pay off your debts, or replace your income for a few years if you die unexpectedly. But it might not be enough to cover your long-term financial goals or obligations, such as college education, retirement savings, or estate planning.

Graded benefit whole life insurance is not the only option for people who cannot qualify for other types of life insurance due to health issues or age. There are other alternatives that you should consider before you buy it. Here are some of them:

• Guaranteed issue life insurance: This is a type of life insurance that does not require any health questions or medical exam. It is the easiest way to get life insurance coverage but it is also the most expensive and the most limited. You can only get up to $25,000 of coverage with guaranteed issue life insurance and it usually has a graded death benefit, which means that it will not pay the full amount if you die within the first two or three years of the policy. Guaranteed issue life insurance is usually only available for people who are 50 years old or older and who cannot qualify for any other type of life insurance due to serious health issues.
• Simplified issue life insurance: This is a type of life insurance that does not require a medical exam but uses a simple form of underwriting. It uses a health and lifestyle questionnaire and third-party sources to determine your insurability and rate. Simplified issue life insurance can offer higher coverage amounts (up to $500,000) and lower premium rates than graded benefit whole life insurance but it is harder to qualify for and takes longer to get approved (usually within a few days).
• Group life insurance: This is a type of life insurance that is offered by employers, associations, or organizations as part of their benefits package. It usually does not require any health questions or medical exam for the basic coverage amount (usually one or two times your annual salary) but it might require them for additional coverage amounts (usually up to four or five times your annual salary). Group life insurance is usually cheaper than individual life insurance but it has some drawbacks. You might lose your coverage if you leave your employer, association, or organization or if they stop offering it. You might also have less control over the policy type, the coverage amount, and the beneficiary designation.

How to Shop for Graded Benefit Whole Life Insurance

If you decide that graded benefit whole life insurance is right for you, here are some tips on how to shop for it:

• Compare quotes from different insurers: Graded benefit whole life insurance rates can vary widely depending on the insurer, the policy type, the coverage amount, and your risk profile. You should compare quotes from different insurers online or through an independent agent or broker to find the best deal for your needs and budget.
• Check the financial ratings and customer reviews of the insurers: Graded benefit whole life insurance is only as good as the insurer that offers it. You should check the financial ratings and customer reviews of the insurers that you are considering to make sure that they are reputable, reliable, and responsive. You can use rating agencies such as A.M. Best, Standard & Poor’s, or Moody’s to check the financial strength and stability of the insurers. You can also use online platforms such as Trustpilot, Consumer Affairs, or Better Business Bureau to check the customer satisfaction and complaints of the insurers.

• Read the policy details carefully: Graded benefit whole life insurance policies can have different features, benefits, exclusions, and limitations that you should be aware of before you buy them. You should read the policy details carefully and ask questions if you do not understand something or if you want to make changes to the policy. You should also look for any hidden fees or charges that might increase your costs or reduce your benefits.
• Consult an independent agent or broker if you need help: Graded benefit whole life insurance can be confusing and overwhelming for some people who are not familiar with life insurance or who have special needs or circumstances. If you need help with choosing a policy, you should consult an independent agent or broker who can offer unbiased advice and guidance and help you compare different options from different insurers.

Conclusion

Graded benefit whole life insurance is a type of permanent life insurance that does not pay the full death benefit for the first two or three years, unless the death is accidental. It can be a viable option for some people who need a small amount of coverage and who cannot qualify for other types of life insurance due to health issues or age.

But graded benefit whole life insurance is not for everyone. It has some drawbacks that you should be aware of before you buy it. It offers lower coverage amounts, higher premium rates, and fewer policy options than other types of permanent life insurance that require a medical exam or use accelerated underwriting. It also poses a higher risk for the insurer, which means that they might reject your application or charge you more based on your health and lifestyle.

Therefore, you should weigh your options carefully and compare different types of no-exam life insurance before you decide to buy graded benefit whole life insurance. You should also shop around for the best graded benefit whole life insurance policy that meets your needs and budget. And you should consult an independent agent or broker if you need help with choosing a policy.

If you are interested in getting graded benefit whole life insurance, you can get a free quote online or contact an agent for more information. Graded benefit whole life insurance can be a convenient way to get life insurance coverage without a medical exam but it is not the only option. You should explore all your options and find the best one for you.