Two final expense policies with the same coverage amount can behave very differently in their first years. The difference is whether the benefit is level, graded or modified. It is one of the most important things to understand before you buy.
Level benefit
A level benefit policy pays the full amount from the first day the policy is in force, whatever the cause of death, subject to the policy’s exclusions. Applicants in reasonable health who can answer the insurer’s health questions favorably are usually offered this type.
Graded benefit
A graded policy pays only part of the benefit if death from illness occurs early on. A common pattern is a percentage of the benefit in the first year, a larger percentage in the second year and the full amount after that. The percentages are set by each insurer.
Modified benefit and guaranteed issue
With a modified benefit, death from illness during the waiting period, usually two years and sometimes three, pays a refund of the premiums paid plus interest instead of the benefit itself. Guaranteed issue policies, which ask no health questions, work this way.
What about accidents?
On many graded and modified policies, accidental death is paid in full from the start. Read the policy’s definition of an accident, because it is narrower than everyday use of the word.
| Policy type | Death from illness in the first two years | After the waiting period |
|---|---|---|
| Level | Full benefit | Full benefit |
| Graded | A percentage of the benefit | Full benefit |
| Modified or guaranteed issue | Premiums paid plus interest | Full benefit |
These are typical structures. The terms of a specific policy are the ones that count.
The waiting period is not the contestability period
People often mix these up. A waiting period limits what a graded or modified policy pays. The contestability period applies to nearly every life insurance policy, including level ones: for about the first two years, the insurer can review the application if a claim is made and can deny it if an answer was materially untrue.
How to avoid an unnecessary waiting period
- Do not assume your health rules out a level policy. Insurers differ in which conditions they accept.
- Answer every health question accurately.
- Work with an agency that can compare more than one insurance company.
Read more about guaranteed issue life insurance and no medical exam policies.
This article is general information, not legal, tax or financial advice. Policy features, eligibility and prices depend on the insurance carrier, your state and your personal details.
