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Graded Benefit Whole Life: Learn Your Options

Getting Life Insurance when You are “Uninsurable”

One of the biggest financial mistakes people make when they are young and holding down a good job is to rely on the life insurance provided by the employer. Group life insurance is a good thing to have, and it's nice of the employer to pay the pennies per thousand to provide it as a benefit, but many people discover to their dismay that the insurance usually does not go with them when they lose their job for any reason, including retirement, company downsizing, and early job loss due to disability. When a person shops for life insurance in their middle age or senior years, they discover that it is much more expensive and—if health issues have become a factor, traditional life insurance may be completely unavailable.

The Guaranteed Option

The option that most people have as long as they are 50 or older is graded benefit whole life. This is a type of whole life policy that works like a savings account for the first two years. That is, if a person dies of illness in the first two years of the policy, the benefit will be the return of premium plus a hefty interest, often as much as 10%. Find a savings account that pays that much! The special feature of the graded benefit whole life is that there are no health questions. Thus it is sometimes also called "guaranteed issue" life insurance. If the company offers it for your age, you are guaranteed to get it.

Numerous companies offer graded policies through the mail and TV advertising. Unless you are very familiar with insurance language, you should be careful about just signing up for something that landed in your mail box. Many mail order policies not only have a graded benefit, but also are a graded premium whole life. That means your premium will go up on a scheduled frequency, either yearly or whenever you enter a new five year age band. A good company will give you a whole life with a "level," premium—that is a payment that will never change.

Graded policies earn cash value just like any other whole life policy; the growth, however, is slow, so don't take it out with the expectation of borrowing against it or cashing it out in just a few years.

When Not to Purchase a Graded Benefit

Graded benefit whole life is a valuable product if it is the one you need. However, if your health is good enough to qualify for a standard life insurance policy, don't sign up for a graded benefit. Because there are no health questions, the premium is automatically higher. A person who doesn't complete health underwriting is considered a greater risk.

All graded policies have a clause requiring them to pay the full value if you die in an accident rather than from illness. In fact, most graded policies have an available rider for additional accident coverage. The rider is very inexpensive—usual $5.00 or less for doubling the face value. Of course, the rider will only pay if there is an accident.

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