The best final expense insurance companies out there offer different types of coverage, including whole life insurance with a graded death benefit. And many people want to know,
“What is a Graded Death Benefit?”
A graded death benefit is a term used to describe a “clause” within every guaranteed issue life insurance policy, which will limit coverage paid out for “natural” causes of death.
This is an important term and why…
We wanted to take a moment and discuss what a Graded Death Benefit is, as well as answer some of the most common questions we get asked by clients who are considering purchasing a guaranteed issue life insurance policy.
Questions which will be addressed in this graded death benefit article will include:
- What is a Graded Death Benefit?
- What do life insurance “mean” when they refer to a “natural death”?
- Do all life insurance policies contain a Graded Death Benefit?
- Why are Graded Death Benefits a part of certain Final Expense Insurance policies?
- Are all Graded Death Benefits the same?
- What can I do to increase my chances of finding the “best” life insurance policy for me?
So, without further ado, let’s dive right in!
What is a Graded Death Benefit?
Simply put, a graded death benefit is a clause written into burial life insurance policies, that is going to limits the death benefit payout during the first two or three years of the policy.
And by limit,
We are referring to the fact that a policy with a graded death benefit is a period of time in which the policy WILL NOT PAYOUT the full death benefit if the insured dies from natural causes.
How do life insurance companies define “natural death”?
Life insurance companies will refer to a cause of death as a “natural” one when it is not caused by accidental or external means. It is a death that results from natural causes such as old age, illness, or disease.
Life insurance policies often differentiate between natural deaths and accidental deaths, because the cause of death can often affect the payout of the policy.
With regards to final expense policies that contain a graded death benefit, it means that only accidental causes of death will be covered during the graded death benefit period, and all natural causes of death will go uninsured.
Conversely, many traditional term or whole life insurance policies which will provided coverage for both natural and accidental causes of death immediately upon approval, some will also provide an additional death benefit to their insured in the event that the death was caused by an accident.
Do all life insurance policies contain a Graded Death Benefit?
Not all life insurance policies include a graded death benefit. Graded death benefit policies are a specific type of life insurance policy that provides an immediate death benefit for accidental causes of death, and then a later death benefit for natural causes 2 years (sometimes 3 years) after the policy has gone into effect.
In fact, most traditional life insurance policies do not have a graded death benefit. Instead, they provide a fixed death benefit that remains the same throughout the term of the policy.
Why Do Some Final Expense Insurance Policies Have a Graded Death Benefit?
Some final expense insurance policies have a Graded Death Benefit because they are designed to provide coverage to people who may have difficulty obtaining traditional life insurance. Final expense insurance, also known as burial insurance, is a type of life insurance that is specifically designed to cover the cost of a person’s funeral and other end-of-life expenses.
Many people who purchase final expense insurance are older or may have health issues that make it difficult to qualify for traditional life insurance. As a result, some final expense insurance policies include a Graded Death Benefit feature as a way to manage risk and keep premiums affordable.
The Graded Death Benefit feature allows insurance companies to offer coverage to people who may be considered higher risk, such as those with pre-existing medical conditions or a history of chronic illness. By phasing in the death benefit over time, the insurance company can limit its exposure to risk while still providing some level of coverage to the policyholder.
It’s important to note that not all final expense insurance policies have a Graded Death Benefit. Some policies offer an immediate death benefit payout to the beneficiary upon the policyholder’s death, while others may have a waiting period before the death benefit is fully payable.
Let’s now take a moment and examine the three most common types of final expense insurance policies available as defined by the type of death benefit that they offer.
The three types of final expense insurance policies are:
Final expense insurance policies typically offer three types of death benefit options:
- Level Benefit
- Graded Benefit
- Modified Benefit
A level benefit final expense policy is called a “level benefit” policy because it provides a fixed, predetermined death benefit that does not vary over the term of the policy. This means that the policy pays out the same amount regardless of when the policyholder dies.
These level benefit policies are often simpler and easier to understand than other types of life insurance policies, making them a popular choice for people who are looking for coverage to cover their final expenses.
A level benefit policy does not contain a graded death benefit. As a result, there are some health questions to navigate versus the following options. Which means that not all applicants will be approved, particularly if they have been diagnosed with a serious pre-existing medical condition.
A graded benefit life insurance policy (not to be confused with the term “graded death benefit,”) is a type of life insurance policy that provides a death benefit that increases over time. With this type of policy, the death benefit starts out at a lower amount when the policy is first taken out and then increases incrementally over the course of the policy.
For example, a graded benefit policy may pay out only 40% of the face amount in year 1. And in year 2, 70% of the death benefit would be paid, with the full death benefit paid out in year 3 and thereafter.
Graded death benefit policies that do not require you to take a medical exam or answer any health related questions will contain a Graded Death Benefit Clause.
In general, graded benefit policies tend to be easier to qualify for than a level benefit policy.
A modified benefit policy, such as guaranteed issue life insurance, contains a true graded death benefit. In the first two or three years of the policy, it will only pay out a return a premium, plus maybe 8-10%, for death due to natural causes.
Since modified benefit policies have a graded death benefit, they are much easier to qualify for than both the graded benefit and level benefit policies mentioned above.
For example, a guaranteed issue life insurance policy will have zero health questions. Now since it has no health questions, it will typically cost more than the other two final expense insurance options.
Is it fair?
Most folks aren’t going to be happy about purchasing a life insurance policy that contains a graded death benefit, which is why we want to take a moment and explain why these “clauses” are necessary for an insurance company to be able to offer these “types” of life insurance policies.
When one applies for a traditional life insurance policy, they will need to “prove” or demonstrate that they can “medically qualify” for such a policy. This is why most applicants will need to take a medical exam to qualify for coverage.
Now in cases where someone may choose to apply for a no medical exam life insurance policy, they will still need to answer a series of medical questions and allow the insurance company to order a wide variety of reports.
Reports such as:
- Personal medical records,
- A prescription medication report,
- A DMV report,
- A credit check (in some cases),
- A criminal background report,
- A Medical Information Bureau Report (MIB)
Which means that…
When you apply for a traditional life insurance policy, the insurance company has access to a considerable amount of information about you, which they use to assess the level of risk you represent. If they consider you an acceptable risk, they may approve your application without requiring a Graded Death Benefit. However, with Guaranteed Issue Life Insurance policies, the insured is not required to undergo a medical exam or answer any medical questions. This means that the insurer has no way of knowing whether the applicant has any serious pre-existing medical conditions. As a result, these types of policies may have a Graded Death Benefit as a way to manage risk and keep premiums affordable.
Insurance companies choosing to offer these “types” of life insurance policies also aren’t going to order supplemental reports on a client (in most cases) either.
So, in essence, the only thing that an insurance company will have to protect themselves from insuring someone who is seriously ill will be the Graded Death Benefit.
“Which makes sense, right?”
Otherwise, most people would choose to wait till the last minute before deciding to purchase their life insurance in cases where one’s death can be anticipated.
OK, so now that we understand “WHAT” a graded death benefit is, and “WHY” they are necessary, let’s examine whether all graded death benefits are the same.
Are all Graded Death Benefits the same?
No, not all graded death benefits will be the same. Different guaranteed issue life insurance policies will have different graded death benefit periods.
Some graded death benefits may end in two years while others will require an insured to wait up to three years before the policy will cover natural death. This is the main reason why you’ll want to know exactly what kind of graded death benefit is being offered to you.
But that’s not all…
Because it’s fair to say that the “final expense” insurance market is a very competitive for insurance companies to compete in, so, while all guaranteed issue life insurance policies will contain a graded death benefit, some insurance companies will try to make “their” graded death benefit more “palatable”.
More palatable by…
Including additional benefits to their policy which in some cases would return all the money that an insured paid into their policy during the graded death benefit period in the event that they died from a “natural cause” of death.
While the insured’s family wouldn’t receive the death benefit from the insurance policy, they would receive all of the money back that the insured paid to the insurance company.
“This benefit is only available with some insurance carriers and may also include interest on the money paid to the carrier”.
Which is why…
Fully understanding and comparing different graded death benefit clauses between the different final expense insurance companies should always be a priority when shopping for coverage. This brings us to the last topic that we wanted to discuss here in this article, which is…
What can I do to increase my chances of finding the “best” life insurance policy for me?
In our opinion, the best thing that you can do to ensure that you find the best final expense insurance policy that you can qualify for is to be sure that you always ask three questions when comparing policies.
How long will my life insurance policy last? Am I buying a term life insurance policy or a whole life insurance policy?
How much insurance coverage am I being offered, and will the amount ever change throughout the life of the insurance policy?
How much will I need to pay for my coverage each month, and will this amount ever change throughout the life of the insurance policy?
Does this policy contain a graded death benefit, and if so, can I see what it says exactly?
With this information in hand, you’ll then be able to accurately compare the different life insurance policies that you’re being offered and make an INFORMED decision, which is sure to help you find the “best” life insurance policy for you.
And the great thing is…
If you call IBUSA, we specialize in helping folks find quality final expense insurance policies and know which ones “tend” to provide the industry’s best coverage! So give us a call and let us show you what we can do for you!