Having a graded death benefit on a life insurance policy means that your beneficiaries won’t get the full death benefit if you pass away from an illness, disease or old age within a few years after buying the policy. But these policies generally pay the full amount any time if you die from an accidental cause, such as a car crash or a fall.
Graded death benefits are a common part of policies that ask for little or no medical information on the application, such as guaranteed issue life insurance. It’s a safeguard for life insurance companies in case terminally ill or critically ill people buy a policy.
Graded death benefits have a “schedule” of what payment will be made depending on how long ago you bought the policy. Some policies provide a refund of the premiums paid plus some interest in the first year, then a percentage of the death benefit, usually up to three years after the policy purchase.
For example, a graded death benefit might look like this:
| Death after buying policy: | Beneficiaries get: |
|---|---|
| Year 1 | Return of premiums plus 15% interest |
| Year 2 | 30% of face amount |
| Year 3 | 60% of face amount |
| Year 4 and after | Full face amount |
Regular term life insurance and whole life insurance policies do not have a graded death benefit. They pay 100% of the death benefit right away, even if you die the day after the policy goes into effect.