A graded death benefit is a type of insurance policy with specific limitations on it. These limitations have to do with the timing of the policyholder’s death in relation to how much of the benefit their loved ones receive. Understanding the graded death benefit can change what type of policy you choose to purchase. Read on to learn more about graded death benefits.
Types of End of Life Policies
There are multiple types of insurance policies that you may buy to help reduce your end-of-life expenses for your loved ones. The three major types of policies that also include death benefits are final expense policies, life insurance policies, and preneed funeral policies. It’s useful to understand the difference between all of these policies to know what the graded death benefit is and how it can impact them.
Life Insurance Policy
A life insurance policy is a type of plan that allows your loved ones to be financially supported after your death. Typically, a life insurance policy has a large death benefit. The death benefit is the amount of money your loved ones receive after you pass. Most life insurance plans have a policy amount of $50,000 at the minimum to well over $1 million. If, for example, you choose a policy with a $250,000 death benefit, your loved ones will receive $250,000 when you pass. Life insurance policies are flexible but are more costly — since the death benefit can be so substantial. They also require many policyholders to be in good health when they first purchase the plan.
Final Expense Insurance
Final expense insurance — also called burial insurance — is like life insurance but has a smaller death benefit. Final expense insurance policies typically have a death benefit of $2,000 to $50,000. These policies are usually aimed at lowering costs associated with the end of your life, such as funerals and debt. This is different from standard life insurance policies, which are designed to financially support loved ones for a longer period of time — after the policyholder passes away. Final expense policies are often easier to buy than standard life insurance policies. While they’re less expensive, they’re also less stringent in who they accept. Many people with health issues that would be rejected by standard life policies are accepted by many final expense policies.
Preneed Funeral Insurance
A preneed funeral insurance policy is just pre-paying for your funeral. Generally, you pick one funeral home and pre-pay for the ceremony. You can pick out your casket, your service package, and many of the costlier items associated with funerals. You then pay this amount in advance. Preneed policies are significantly less flexible than both final expense and life insurance policies. A preneed policy is only for the funeral. In contrast, both life insurance and final expense policies can be applied to any costs the beneficiaries would like.
All three of these policy types can include a graded death benefit. By understanding the graded death benefit, it can help you know which plan type is best suited for you at a particular time in your life.
Definition of Graded Death Benefit
The graded death benefit is a limit on when you can receive your claim, or the death benefit. The “graded” part of the policy means that your benefits paid out will increase over time. Typically, it starts with a two-year time period immediately following the purchase of your policy. If you pass away within that 2-year period after you purchase the policy, your beneficiaries will not get the whole death benefit. Instead, they’ll only receive the amount of money that you paid for all of the months added up, plus the average interest rates. The typical rates range from 7% to 10% every year, but some companies offer as much as 20%.
For example, say you bought a life insurance policy for $100,000 with a graded policy and interest rate of 10%. If you were paying $400 per month but died after 10 months, your loved ones would receive the 10 monthly payments you made plus an additional 10%. This would equal $4,000 + 10% of $4,000. In all, your loved ones would get $4,400 if you had a graded policy and passed away after 10 months. However, if you pass away two years and one day after purchasing the plan, your beneficiaries will receive the full $100,000.
Advantages and Disadvantages of Graded Death Benefits
You may be wondering why people would buy a graded policy at all. It depends on the type of insurance policy you’re purchasing. For example, life insurance can be very expensive. It’s even more expensive for people with severe health problems. Still, it may be impossible for some people to get approved. Those people may instead purchase final expense insurance. For folks who are early in the disease process but anticipate their health deteriorating in decades, a graded policy may be their best option. It’s often cheaper than a traditional policy but has an added benefit.
A graded policy is always a permanent policy. This means that after the two year period, regardless of how long you live, the company will pay your beneficiaries the death claim. This is very different from a term policy. Certain life insurance policies have a term limit. This means that if you die after the term expires, your beneficiaries don’t receive any compensation. For example, if you purchase a 25-year term policy at age 55 and die at age 90, your policy expired at age 80. Your beneficiaries now receive no death benefit. A graded policy, however, is always permanent.