What is a graded benefit life insurance policy?
It’s a life insurance plan that provides a death benefit that increases with the age of the insured.
Graded benefits may increase gradually and then level off, or they may increase sharply before becoming level.
This type of life insurance coverage is most common in juvenile life insurance, life insurance plans for seniors, people with health conditions, or those who have been turned down for life insurance.
Example: A senior life insurance plan providing $20,000 of life insurance coverage for a 10 year term with premiums of $300 and a 2 year graded death benefit period.
In this example the insured person pays the annual premium of $300 once a year for 10 years.
If the insured person dies within the 10 year term, the beneficiary receives the $20,000 death benefit.
However, if the insured dies within 2 years of purchasing the life insurance policy the death benefit paid will only be the amount of premium paid plus any interest on that premium.
If the insured were to die after the 2 year graded benefit period, more than 2 years after buying the policy, the beneficiary receives the full death benefit of $20,000.
In a graded benefit life insurance policy, the death benefits are not level. Policyholders will be paid a certain percentage of the full death benefit if death of the insured person should occur in year one, a larger percentage if death occurs in year two, and so on. By year five, most graded death benefit policies have reached a level death benefit of 100% of the coverage.
Premiums for graded benefit life insurance policies are generally higher than those for standard life insurance policies since the policyholder presents greater risk of a death claim to the insurance company. Even though the death benefit is not level, premiums are, the premiums remain the same each year of the policy.
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