Graded Premium Life Insurance
Term life or whole (permanent) life? A graded premium life insurance policy allows the insured to pay a substantially lower initial premium that increases over the course of three to five years and then reaches a fixed premium that stays the same for the remainder of the life insurance term. Graded premium life insurance also provides for the accumulation of cash value and a guaranteed death benefit to beneficiaries. A graded premium life insurance policy is a good idea for insurance shoppers who want more life insurance than they can afford at the moment, and don't want to “settle” for term life insurance.
A graded premium life insurance policy has the same general provisions that a whole life policy has, with the obvious exception of the graded premium. Of course, as mentioned before, the initial premium is much lower than that on a regular whole life policy, and gradually increases over a set amount of time until it reaches a fixed level at which it will remain for the life of the policy. As with a whole life policy or term life insurance policy, graded premium policies will be lower depending on how young the insured is.
As with a whole life insurance policy, graded premium insurance policies allow the possibility of dividends. Dividends are, of course, not guaranteed – they are paid when the insurer's costs wind up being less than the set premiums – but this can be an excellent little boost if dividends become available.
Like whole life insurance policies and unlike term life insurance policies, graded premium policies are able to accrue cash value. Some of the money paid into your policy turns into cash value, should you choose to cancel the policy, you will be given the cash value. You may also have the option of borrowing money against the cash value of your policy for a loan, as long as the policy remains in force. The amount of the cash value that will accumulate in your policy is of course dependent upon the face value of your policy and how long you have owned it. One of the best things about any cash value insurance policy is the fact that cash value is calculated on a tax-deferred basis. Keep in mind, however, that any cash value borrowed or used for loans is deducted from the guaranteed death benefit and any money you would receive should you cancel the policy.
So, what are the main advantages of choosing a graded premium life insurance policy over term life? The first advantage is the “forced savings” aspect, which simply means that you invest money in your policy and you may choose to use this money for retirement in the future. There are also, of course, low initial premiums, and the guaranteed tax-deferred cash value.
There are also disadvantages to a graded premium life insurance policy. The rates are higher than term life policies, and over the life of the policy, the insured usually tends to ultimately pay more than in a regular whole life insurance policy. On top of this, the investment returns usually aren't that high.
