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Graded Benefit Whole Life Insurance Definition – Contestability periods are a period of time within each insurance policy that allows the insurance company to cancel or extend a life insurance policy if misrepresentation or fraud on the part of the insured is discovered.
Throughout the world of life insurance, there are two concepts that often confuse many people: What is the difference between graduated benefits and a competitive period?
Graded Benefit Whole Life Insurance Definition
While the two may sound similar to some, the meanings differ in how they apply to life insurance.
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Graduated benefit is a term widely used in final expense insurance and guaranteed issue life insurance policies where the death benefit of the policy is suspended for the first two to three years unless the death is accidental. Since these types of policies are typically sold to older people without underwriting, this type of life insurance caveat helps protect the insurance company from having to pay benefits on a claim where the death was due to natural causes that would otherwise have been discovered through a traditional fully underwritten policy with a medical examination. Graded whole life policies are often intended for people who are unable to get a standard type of life insurance or who are elderly with a life expectancy between 2-10 years.
With graduated premium life insurance, you get a refund plus interest (up to 10% and varies from company to company) of the premiums paid during the waiting period if death occurs within the graduated lifetime benefit. This ensures that the policyholder will at least get their money back if the policy does not pay out.
Other companies may offer percentages of the face value of the policy, which gradually increase over the first few years. For example, 30% of face value in year 1, 75% of face value in year 2 and 100% of face value in year 3.
The graduated benefit structure can vary from company to company, so it is best to work with an independent life insurance agent who can best navigate the market to find the best solution for you.
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A contestability period is a window of time, usually two years after a life insurance policy becomes effective, that allows the life insurance company to investigate the accuracy of the information in the application before paying a claim. During this time, the insurance company may deny or reduce the death benefit in the event that incorrect information has been discovered when you take out your life insurance application. In these types of situations where a person dies during the contest period, the payout to beneficiaries may be slower as the insurance company does its due diligence to ensure that the information on the application was correct.
Steve applies for life insurance and lies about being a smoker. The insurance is approved and issued at non-smoking rates; however, he dies a year later due to aggressive lung cancer. The insurance company may review the application and choose to deny coverage and issue a refund of premiums instead because he was dishonest during the life insurance application process.
In case you die and the information on the application is correct, the insurance company is obliged to pay the death benefit according to the terms of the policy, as it is a legal contract. Remember that life insurance companies can still deny coverage in the event that there was fraudulent activity or information provided during the application process, even after the contestability period expires.
While the contestability period is usually two years on most policies, the suicide clause is completely different and has nothing to do with contestability. In this case, death due to suicide is not covered in the first two years and will only provide a refund of premiums paid; however, suicide after this two-year period is generally covered and pays the full death benefit.
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Not all policies have a graduated benefit, but almost all life insurance policies have a grace period. Both of these structures provide a level of protection for the life insurance company and for the consumer in an effort to keep prices low and discourage fraud and abuse in the insurance industry. Without both of these setups, claims paid would result in inflation in pricing and stricter underwriting guidelines that could greatly limit the amount of risk an insurer would be willing to take on. Navigating the world of life insurance can be daunting, with different options to consider. Whole life insurance, a form of permanent cover, offers the benefit of stable premiums, a cash value component and potential dividends.
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Group Term Life Insurance Benefits
There are many reasons to buy life insurance – both private and business. For most people, however, the main purpose is to protect other individuals or entities from financial loss in the event of death.
When looking for the type of coverage to purchase, there are essentially two primary categories that life insurance falls into.
Term life insurance is considered to be the most basic form of life insurance coverage on the market. It consists of pure death protection with no additional cash value or investment component. This is why term life insurance is typically the most affordable type of life insurance to buy – especially for those who are young and in relatively good health, although there are no medical exam life insurance policies if needed.
Permanent life insurance policies have two parts – a death benefit along with a cash value allocation. These types of policies offer an insurance component that pays out a specified amount upon the death of the insured. It also offers a cash value component that accumulates cash that can be used by the policyholder to withdraw or borrow against.
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Guaranteed throughout the insured’s “whole” life, or until the beneficiary pays out, whole life is considered a permanent life insurance plan. It is the simplest permanent life insurance package that consumers buy most easily.
One of the reasons that policyholders research whole life insurance plans is that the premium does not fluctuate throughout the term of the policy. Although whole life insurance premiums may initially be higher, premiums do not increase as the policyholder ages. Whole coverage can also be referred to as ordinary life insurance or equal life insurance.
Whole life insurance policies contain two primary components. These include a death benefit and a cash value component. The death benefit can be a fixed amount, or conversely it can increase over time. (An increase in the policy’s death benefit may cause premiums to rise).
The cash value component will typically contain two separate elements. One is the actual cash that grows on a predetermined basis over the life of the policy.
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Initially, the cash value of the insurance grows slowly. This is largely because the majority of the early premium goes towards paying the agent’s commission as well as other fees. Over time, however, the whole life insurance cash value will steadily grow – in most cases based on a guaranteed minimum return.
As it continues to grow, this portion of the cash value will eventually “velocate,” or become equal to the amount of the policy’s death benefit at policy maturity. This usually happens when the insured turns 100 years old.
In some cases, policies may also offer a non-guaranteed cash value element consisting of policy dividends or excess interest. The combination of the general cash value portion with the non-guaranteed cash value build-up can increase the value of the policy over time.
The cash value of a life insurance policy can typically be accessed at any time by the policyholder through withdrawals or policy loans. It is optional to repay the loan. However, any portion of the loan that is not repaid at the time of the insured’s death will reduce the amount of the death benefit that the policy beneficiary receives.
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A participating policy will share the insurance company’s profits with their policyholders. This is most often done by paying dividends. The policyholder will not be taxed on the dividends because they are considered a repayment of part of the policy’s premiums.
With a non-participating policy, the insurer will assume all future performance risk. In other words, if an insurance company’s actuaries underestimate the cost of future claims, then the responsibility will shift to the insurance company to make up the difference. In such a case, where there has been an overestimation of the insurance company’s future claim costs, the insurance company can keep this difference. Non-participating policies do not pay dividends to their policyholders.
First, although the premium may start higher than insurance premiums for the same amount
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