There are two types of graded life insurance:
- Graded benefit.
- Graded premium life.
Each type of policy has a specific purpose and accomplishes something different, yet both are whole life insurance policies. Graded-benefit policies help you obtain insurance coverage when you otherwise could not due to a health condition while graded-premium policies provide coverage when it would otherwise be unaffordable.
Graded-Benefit
Graded-benefit life insurance is a form of whole life that redistributes the death benefit of the policy so that you can obtain insurance when you otherwise wouldn’t be able to get it. People with diabetes, those who are obese, or those who have other serious health problems often qualify for graded policies when they are turned down for straight whole life or term insurance. Read also: Things you Really Need to Know about Senior Life Insurance.
The insurer can afford to offer the policy because:
- It typically offers lower-than-normal face amounts of around $15,000 up to $25,000 and;
- Insurance companies seek reinsurance from other insurance companies to spread out the risk of the claim being paid.
The lower-than-normal face amounts control the amount of risk the insurer accepts while reinsurance spreads out the risk. Reinsurance is a special type of insurance that insurers purchase from other insurance companies. Like any other type of insurance, it’s meant to transfer risk. Some insurers specialize in insuring high-risk individuals and even actively advertise their specialty in “adverse risk.” Typically, life insurance brokers are the ones who reach out directly to consumers with this information since a special pre-qualification procedure might be necessary to obtain the best possible quotes. However, some online brokers have become very adept at providing life insurance quotes without a face-to-face meeting or even a phone call.
Once your application is approved, the insurer redistributes the death benefit so that the you receive the full face amount of insurance only after a period of several years. Beyond this point, the policy matures similar to a traditional whole life plan. Read also: Don’t Apply for Life Insurance Quotes for Over 80 Until You Read This.
During the policy’s early years, your death benefit is equal to your premium payments plus a declared rate of interest. Most insurers credit 7 to 10 percent towards the policy’s death benefit. By the third or fourth year, the face amount is usually fully earned. If the policy pays dividends, this amount will be added to the face amount.
While some companies do offer this type of insurance to younger individuals, it’s typically reserved for those over 50 who are in poor health. Because of the low bar to entry, there is either a simplified underwriting procedure or no health questions at all. As a consequence, premiums can be up to twice as much as traditional whole life or universal life plans. The only way to really know is to obtain several life insurance quoes from your broker.
Graded-Premium
Graded premium life insurance provides whole life coverage at reduced premium costs in the early years of the policy while graduating the premiums over time. This is a useful payment strategy when you cannot afford premiums for a whole life policy but still want permanent insurance coverage.
You may be drawn to this type of policy if:
- You are young and cannot afford the high premiums of traditional whole life.
- You expect to start a family soon, but cannot afford traditional insurance coverage.
- You have recently started a business, want to purchase insurance, but have limited cash flow right now.
Once your application is approved, the insurer will offer you graded life insurance premiums for the first five to 10 years. This means that your that premiums start out low and increase over that five to 10 year period. Beyond that point, you pay ordinary premium rates for the rest of your life. If the company pays dividends to the policy, those dividend payments may be used to further reduce the out of pocket premium cost. Read also: Learning the Benefits of Life Insurance Policies.
Unlike graded-benefit policies, graded-premium policies are often fully underwritten. This means that you must undergo a full medical exam before you are approved for a policy. The insurer will require a blood test, urine test, and a basic physical examination by a paramedical examiner. The samples collected will be sent to a lab of the insurer’s choice, though you may request a copy of any test results. After about three to four weeks, your policy will be issued.
Considerations
Before applying for any graded policy, you should meet with a financial professional to assess your need for life insurance. A fee-only life insurance planner will collect a fee for advice but will not sell you a policy. Instead, you’ll get recommendations for policies and you’ll have to then go out on your own and obtain life insurance quoes. Never purchase a policy without obtaining several quotes, and always examine the cost surrender index of your policy. Regardless of the policy type, it’s always a good idea to understand how much your graded life insurance policy is costing you.