Understanding Graded Whole Life Insurance vs Contestability Period

Graded benefit periods are different than a contestability period in that graded benefits are a period of time at the beginning of a certain life insurance product that removes coverage for 2-3 years for a non-accidental death.
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advisor explaining graded whole life insurance

Written by Brian Greenberg
CEO / Founder & Licensed Insurance Agent

Last updated: March 20th, 2023

Reviewed by Grant Desselle
Licensed Insurance Agent

Contestability periods are a period of time inside every insurance policy that allows for the insurance company to cancel or augment a life insurance policy if misrepresentation or fraud is discovered on the part of the insured.

In the whole life insurance world, there are two concepts that often confuse many people: What is the difference between graded benefits and a contestability period?

While the two may sound alike to some, the meanings are different in regards to how they apply to a life insurance policy.

What is a graded benefit life insurance?

Graded benefit is a term used largely in final expense insurance and guaranteed issue life insurance type 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 typically are sold to older individuals with no underwriting, this type of caveat inside a life insurance policy helps protect the insurance company from having to pay out benefits on a claim where the death was due to natural causes that otherwise would have been detected through a traditional fully underwritten policy with a medical exam. Graded whole life insurance policies are often meant for people who are unable to get a standard type of life insurance policy or who are older with a life expectancy between 2-10 years.

Why pay a premium if I am not covered?

With a graded premium life insurance, during the waiting period, you receive a refund plus interest (up to 10% and varies by company) on the premiums paid if there is a death within the graded benefit whole life period. This ensures that the policyholder will at least get their money back if the policy doesn’t payout.
The terms graded and modified whole life insurance are used interchangeably among final expense insurance companies.
Other companies may offer percentages of the face value on the policy which gradually increase over the first few years. For Example, 30% of the face value in year 1, 75% of the face value in year 2, and 100% of the face value on year 3.

The graded 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 marketplace to find the best option for you.

What is a contestability period?

A contestability period is a window of time, generally two years, after a life insurance policy goes into force that allows for the life insurance company to investigate the accuracy of information the application prior to paying a claim. During this time, the insurance company can deny or reduce the death benefit in the event there has been misrepresentation discovered when underwriting your life insurance application. In these types of situations where a person dies during the contestability period, the payout to beneficiaries may be slower as the insurance company does its due diligence to ensure the information on the application was correct.

To better understand this concept, we’ve attached a real-world example below of how contestability works.

Steve applies for a life insurance policy and lies about being a smoker. The policy is approved and issued at non-smoker rates; however, he dies a year later due to aggressive lung cancer. The insurance company can 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.

What happens if you die during the contestability period?

In the event that you die and the information on the application is correct, the insurance company is required to pay the death benefit per the terms of the policy, as it is a legal contract. Keep in mind that life insurance companies can still deny coverage in the event that there were fraudulent acts or information provided during the application process, even after the contestability period expires.

While the contestability period is usually two years on most insurance policies, the suicide clause is completely different and has nothing to do with contestability. In this case, death resulting from suicide is not covered for the first two years and will only provide a return of premiums paid; however, suicide after this two-year period is generally covered and pays the full death benefit.

In Summary

Not every policy has a graded benefit, but almost every life insurance policy has a contestability period. Both of these structures provide a level of protection for the life insurance company and for the consumer in an attempt to keep rates low and discourage fraud and abuse inside the insurance industry. Without both of these setups, paid-out claims would cause there to be inflation in pricing and stricter underwriting guidelines that could severely limit the amount of risk an insurance company would be willing to take on.

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