Do all Life Insurance Policies Have a Waiting Period?

May 28, 2018

You buy life insurance because you want to protect your loved ones in the event of your death. Did you know that not all policies guarantee coverage though? If your policy is too new, you might be subjected to a waiting period that could leave your loved ones without a penny despite your purchase of life insurance.

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Before this happens to you or your loved ones, learn why you might have a period of waiting and how to get around it.

What is a Waiting Period?

Many life insurance policies (but not all) have a 2-year waiting period. If you buy the policy and you pass away before the 24 months are up, your loved ones may not receive a payout. This is how the insurance company protects themselves against risk. They haven’t had enough time to make any money on your policy during that first two years, which is why they don’t pay any benefits during that time.

Getting Around the Waiting Period

Luckily, there are a couple of ways to get around the waiting period. They may require you to do a little shopping around, though. You’ll have to find a company that offers either a guaranteed or a graded plan.

  • Guaranteed policy – This policy guarantees some type of payout, but it does have a 2-year waiting period. If you pass away during the first two years, your loved ones will receive a fraction of the value of the policy. Typically, insurance companies will pay out the premiums paid up until that point plus a predetermined amount of interest.
  • Graded policy – This policy spells out just how much the insurance company will pay out in the face of your death within 2 years of buying the policy. Typically, the insurance company will specify the percentage they will pay for the first year and again for the second year. The second-year percentage is usually higher than the first.

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These policies are reserved for those that have a chronic health issue and are at risk of premature death. If you are in good health, you don’t have as much of a need for these policies as they can be more costly because of the risk for the insurance company.

As with any insurance policy, make sure you read the fine print. No two policies are the same, especially when you shop with different agents. Find out what the policy covers and ask a lot of questions. Make sure you ask the lender about the risk of dying within the first two years so that you know exactly what you are facing. If there is a waiting period, you need to decide if it’s a risk you are willing to take or if you would rather pay the higher premiums for a graded or guaranteed policy.

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