When shopping around for a life insurance policy, you may have run across a term called a waiting period. A waiting period means that for a time of one to two years after the purchase of the policy, the benefits will only be valued by the premiums that have been paid.
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For example, a life insurance policy with a $50,000 benefit and a two-year waiting period will not pay the $50,000 unless the death occurred at least two years after the policy was purchased. If the death occurred before the two-year anniversary, then the benefits will only amount to whatever was paid on the policy through the premiums.
Why Does Waiting Period Exist?
There are different reasons why waiting periods exist. They are put into place to protect the insurance company so that they have the time to do a proper investigation of the information that was provided. This allows the company to contest a claim that occurred in this time-period while having relatively little regarding the payout to make compared to the full benefit of the policy itself.
It is commonly known that suicide is a disqualification in terms of paying out the benefits in most cases. This waiting period helps to dissuade those who may be contemplating suicide to take out a life insurance policy.
Again, it provides the time for a proper investigation to take place in case there is a dispute in terms of how the policy holder passed away. In some cases, it can be difficult initially to know if the cause was deliberate suicide or an accident depending on the circumstances.
In addition, it also protects the insurance company in case the proper information was not asked when the application was made.
For example, if you are not asked about any previous history of cancer, you are not obliged to provide that information when applying for the policy. This is different than providing false information which the insurance company can dispute when it comes to paying out the benefits.
So, if the policy holder passes away within the two-year time frame, the insurance company is only obliged to pay out the premiums that were collected plus any interest if it applies. That is a small price for an insurance company to pay and covers most unexpected illnesses that a policyholder might have.
Guaranteed Issued and Graded Benefit Life Insurance:
Both types of policies are issued to those who otherwise would not qualify for life insurance because of their current medical state. For each of these policies, the benefits would not be paid out if the policyholder died within the first two years. However, the premiums paid into the policies which include any building interest will be repaid.
By having a waiting period, it protects the insurance company from having to pay out benefits to someone who otherwise would not have qualified for the policy itself. Be sure to ask your insurance agent or company about the details of the waiting period, so you know all the facts.