Graded Premium Whole Life Insurance

If you have a progressive illness, are incapacitated, or are in a nursing home, a graded premium whole life insurance plan is close to no-risk for you. Your heirs will either get back the premiums you paid with interest or they’ll get a death benefit that’s more than you paid. 
By Karen F.
Updated May 10, 2022
graded premium whole life insurance
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If faced with a severe illness, it doesn’t mean you’re left out in the cold when it comes to life insurance. You may have already received a disappointing letter denying your policy. But that’s not the end of the road: you still have an option called graded whole life insurance.

Graded premium whole life insurance has a built-in waiting period of around two years before you receive a life insurance payment. If you should pass on during this time, your heirs will still get some payout. They’ll obtain the amount you paid in premiums with interest.  

And if you live beyond the two or sometimes three-year waiting period, your heirs will get the full death benefit, whether you die by natural or accidental causes.

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Good Candidates for Graded Whole Life   

Graded life policies are for those with progressive medical conditions that aren’t immediately life-threatening. 

They’re mostly for people over 50 with health issues, although younger people may also have preexisting conditions that disqualify them for other life insurance, such as:  

  • Diabetes

  • Parkinson’s disease

  • Alzheimer’s

  • Coronary artery disease

  • Incapacitation

  • Cancer

The Pros of a Graded Life Insurance Policy  

You may wonder why you should invest in a life insurance plan with no payout for two or three years. But these policies have many upsides: 

  • You’re usually spared the ordeal of a medical exam. That’s a bonus, as the exam could have revealed a medical condition that would cause your rates to increase sharply.

  • Approval is faster than the usual underwriting process, which can take weeks to complete

  • Premiums remain the same over time, which is a plus for those on a fixed income. It’s also great for seniors because they usually face higher premiums in later years. 

  • There’s no waiting period for a benefit if the death is accidental. 

Whole Life Policies for Maximum Coverage  

Graded policies (also known as GBLs) are whole-life policies. That means they’re permanent policies that don’t expire on a certain date. There’s no see-saw effect—over time, the premiums won’t go up, and your benefits won’t go down. 

Not all of these policies have a strict waiting period until coverage begins—some phase-in coverage over the years.

And like many whole life policies, a graded policy will pay you interest, although often only in the first few years. The interest is kept in a tax-deferred account, so the cash value builds over time. The amount of interest varies widely, starting as low as five percent and rising as high as 20 percent in the second or third year of coverage.

These are all good features if you have a chronic illness and don’t need extra worries like spiking premiums or a policy that’s going to expire. The interest dividends are a nice perk, too. 

Of course, all of these benefits come at a cost.

The Downsides of Graded Policies  

In the eyes of an insurer, graded policies are high risk. The companies are selling to consumers who may have been turned down by other insurance companies because of a chronic condition. 

That’s why these policies have a delayed benefit period to limit the financial exposure of the insurance company. This is different from standard term life insurance and other whole life insurance policies that generally pay out the full amount of the death benefit, regardless of when you pass away.

Companies also charge higher premiums for a graded policy when compared to most policies. They can cost as much as $200 per month depending on your age and the coverage amount, although costs differ quite a bit among policies. 

On the bright side, most insurers will let you tweak the plan and lower the death benefit, so the premiums fit your budget.

The Biggest Pitfall to Avoid  

Sometimes, the terms of a graded whole life insurance plan sound too good to be true. The company pays back your premiums plus interest if you pass on before the two-year threshold. After two years, there’s a full policy payout. How does the insurer make any money?

One answer is that life insurance companies make more money from investing premiums than they do from the premiums themselves. In 2018, life insurance companies made $145 billion from premiums but an even greater $187 billion from investments. 

Unfortunately for the consumer, insurers also make money on graded policies because many people let them lapse. They can’t afford the relatively high premiums, so they just stop paying.

That means the policyholder has lost insurance coverage and will only get back the cash surrender value of the policy. That’s usually much less than the premiums they paid or the death benefit their heirs would have received.

One way to avoid this pitfall is to choose the right solution in the first place with a broker, such as PolicyScout using our life insurance calculator. You can select the coverage you need without stretching your budget too far.  

Life Insurance for Seniors  

Since graded life insurance is mainly for those in the last half of their lives, it’s fair to ask why they would need life insurance at all. After all, when children have left the nest and can fly on their own financially, many feel comfortable letting their life insurance lapse.

But a good case can be made for keeping life insurance in the latter decades of your life under certain conditions: 

  • Someone in your life is financially dependent on you, such as a special needs child. Bear in mind, though, that a life insurance payout can affect disability income payments.

  • You have outstanding debts that someone else will inherit. Life insurance money could be used to pay off the balance on a mortgage, for instance.

  • You want to provide funds for funeral costs—the median cost of a funeral with a burial and vault in the U.S. is around $8,000.

  • You’d like to leave an inheritance and insurance is an investment you make for your heirs.

  • You have financial obligations for a business you own. 

Comparing Different Policies Is Key  

Looking at different options is very helpful when looking for graded whole life insurance. More than a dozen major carriers offer these policies, but the fees, payouts, and other terms differ widely.

For instance, if you’ve had major heart surgery or a stroke in the last year, you might think that getting insured is a hopeless cause. But that’s not always the case with graded policies. A broker can help you compare several policies to find one that matches your current health condition.  

Four Factors to Weigh  

When you’re hunting for a plan, here are four variables to consider: 

  1. If the policy makes you wait more than two years for a death benefit, it may not fit your medical situation.

  2. You might not be in the right age range for a particular plan. In general, the older you are, the more you’ll pay. Typically, you should be 50 years old to qualify. 

  3. The cost of premiums varies, as does the interest paid. It helps to use a professional broker to secure the best quote.

  4. Some companies offer extra riders and benefits to fit your needs more perfectly.    

When A Graded Policy Doesn’t Make Sense 

There are times when graded life insurance will end up costing you more money than it pays out. That can happen when you, fortunately, live long and prosper. In that case, the premiums you’ve paid may exceed any death benefit your heirs would get. 

You’ll also overpay with a graded policy if you could qualify for a regular life insurance plan but didn’t realize it. Just because you have a preexisting medical condition doesn’t mean you can’t qualify for life insurance that would pay a death benefit on day one. 

Before you opt for graded life insurance, it’s worth checking into other types of coverage to see if you qualify and can save money, too. 

Critical Illness Riders on Your Existing Policy 

Your current policy might have a critical illness rider or a chronic illness rider, which would mean you might not need graded insurance. These riders pay out a big chunk of the death benefit (between 50 and 80 percent) upon the diagnosis of a major condition or an injury. It’s usually taken as a lump-sum payment to offset the costs of medical care. 

A chronic illness rider pays a benefit if you become disabled for an extended period. It’s triggered when you can’t perform at least two of the activities of daily living, like dressing or bathing. 

There are also long-term care riders that are pricier but provide complete coverage for long-term or nursing home care.

A Low-Risk Choice  

Overall, if you have a progressive illness, are incapacitated, or are in a nursing home, a graded life insurance plan is close to no risk for you. Your heirs will get back the premiums you paid with interest, or they’ll get a death benefit that’s more than you paid. 

These policies are often designed for seniors, and the application process is streamlined and hassle-free. At PolicyScout, it’s even easier to compare policies with just a few clicks of the mouse. The dream of having life insurance can become a reality for you, even if you have a chronic health condition. 

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