The Difference Between Graded Death Benefit Life Insurance and Contestability Period

graded death benefit

Many people are confused with the concepts of the graded death benefit and the contestability period. It is probably because both structures involve a time frame. However, the two have very different functions. Graded death benefit life insurance suspends the payout if the insured dies of a non-accidental death during the graded death benefit period (usually 2 to 3 years after insurance enrollment). On the other hand, the contestability period is usually 1 to 2 years after the policy enrollment. It is a period when the insurance firm reviews your application data for any misrepresentation. If any fraud is tracked down, the insurance firm can terminate or modify your plan.

Understanding Graded Death Benefit Life Insurance

People who cannot get approved for a standard insurance plan are the usual consumers of graded death benefit insurance. Typically, these people are the elderly or those who have chronic diseases with short life expectancy. Guaranteed issue plans and final expense policies employ graded death benefit. These policies do not require the insured to undergo a medical exam, unlike the traditional life insurance plan. Graded death benefit protects the insurance carrier from disbursing benefits for natural death.

Why Get an Insurance Plan That Doesn’t Pay?

The graded death benefit arrangement is different for every insurance carrier. Some firms pay a refund of the premiums plus a 10% interest (rates also vary per carrier). It is a money-back guarantee for the policyholder and their family. Other firms offer a gradual death benefit raise. For instance, if the policyholder dies of a non-accidental death a year after his enrollment, the firm will not disburse its beneficiaries’ full benefit. Instead, they will pay out a small percentage of the benefit. They will give a larger amount if the insured dies on year two, and so on. It is helpful to speak with an agent like Coach B.  who can help you find the perfect plan for you. 

Understanding the Contestability Period

Your insurance firm has a right to explore all the information you provided in your life insurance application process. Therefore, it is essential to be direct and open when enrolling for life insurance. Contestability is a duration of time when your insurer looks into the truthfulness of the data you provided before you started paying fees. If the firm uncovers any misrepresentation, it can lower your death benefit. Worse case is they can decline the claim altogether. If the insured dies at the time of contestability, the firm may delay the payout because they must first ensure that the data is factual.

To Illustrate How Contestability Functions:

John is a smoker who applied for an insurance plan and concealed his smoking habit. The firm granted him a plan with a non-smoker rate. Fourteen months later, he died of an incurable lung tumor. His insurance firm can review his information and decline a payout if they find out about his deception. If they choose to, they can reimburse the fees paid. It can happen because John is liable for misrepresentation.

What If You Die at the Time of Contestability?

There is nothing to worry about if you remained truthful in your application. If death occurs to you during the contestability period and your information is accurate, your insurer has to disburse the death benefits. Take note that you are still liable for any misrepresentation without the contestability period. Therefore, if you lied on your application, you can be denied coverage even when the contestability period is over.

Suicide

You will only get a refund of premium if death is by suicide within the first two years of most policies.  After those two years, it is usually covered with full benefits.

Conclusion

The majority of insurance plans have a contestability period, while only specific policies have graded death benefits. The two structures have essential functions in protecting both the insurers and policyholders. The graded death benefit and contestability prohibit inflation, fraud, and strict rules in the insurance industry.

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About Coach B.

After starting his financial career with Phoenix Home Life Insurance Company back in 1992, Scott decided he wanted to provide people with an easier and more enjoyable way to buy life insurance. That was the start of Coach B. Life Insurance, whose mission is to be transparent, honest, and helpful to customers — without ever bugging or pushing them.

In the years since then, he has worked tirelessly to improve the process of shopping for insurance. His goal is to make sure that everyone who comes to Coach B. — whether they end up buying a policy or not — has the best possible experience.

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