What is a Life Insurance Waiting Period?
Just about any type of life insurance policy you purchase will come with a provision known as a waiting period.
It’s something that may be easy to gloss over, and it may not even be mentioned if you are working with an insurance agent.
And while it usually doesn’t impact the outcome of a life insurance policy in any significant way, if it does the result can be catastrophic.
That’s why it’s so important to understand the concept of a waiting period.
What is the Life Insurance Waiting Period?
Technically speaking, a waiting period is a period of time the insured must wait before a new life insurance policy will pay the death benefit.
With a typical life insurance policy, there’s what you may think of as a soft waiting period – known as a period of contestability.
It applies to the first two years the policy is in force.
That isn’t to say the insurance company won’t pay the death benefit if you die within the first two years.
But what it does mean is that the life insurance company has the option to investigate and even challenge a claim within the first two years the policy is in force.
A way to address insurance fraud
It’s really a form of fraud protection for the insurance companies.
Applicants have been known to lie on their life insurance applications, denying that they have certain health conditions.
This is known as insurance fraud, and if the insurance company can prove it, they can deny paying the death benefit.
For example, let’s say you had a bout with cancer 10 years ago that you did not disclose on your life insurance application. And for whatever reason, it also didn’t appear in any medical databases in your history. The insurance company issues the policy based on the assumption you never had cancer.
But nine months after the policy is issued, your cancer returns, and you die within the first two years the policy is in force.
The insurance company can deny paying the death benefit to your beneficiaries, citing your lack of disclosure of your previous cancer episode as evidence of insurance fraud.
In most cases, the only funds your beneficiaries will receive from the insurance company will be a refund of the premiums you paid for your policy.
Some insurance companies will also add interest on top of the premium amounts. But by denying the death benefit and returning your premiums, it’s as if your policy never existed.
Waiting Period and Suicide
Perhaps the most common exclusion in a life insurance policy waiting period is suicide.
It’s virtually standard language in a life insurance policy that the death benefit won’t be paid for suicide within the first two years the policy is in force.
This applies to traditional life insurance policies as well.
Presumably, this is to prevent people from taking life insurance policies then committing suicide to provide a financial benefit for their loved ones.
It’s certainly a tragic situation if an insured does commit suicide within the first two years, without any thought of enhancing their loved ones.
But, such cases have happened, so life insurance companies use the waiting period to protect themselves.
Guaranteed Issue Life Insurance
There’s a special class of life insurance known as guaranteed issue life insurance, and it has an even more restrictive waiting period than other types of life insurance.
It’s a real waiting period because it’s not in place strictly to prevent insurance fraud.
This is a type of life insurance policy for people who do not qualify for coverage based on the condition of their health.
For example, an applicant who is determined to be in poor health will not qualify for standard life insurance coverage.
Guaranteed issue life insurance covers that need, but it does at a cost – or actually, several.
First, the death benefit is notoriously small. A typical guaranteed issue life insurance policy will have a death benefit of no more than $25,000 - $50,000 at most.
Second, premiums are incredibly high. You may pay $6,000 per year for a $25,000 policy.
Third – and this may be the biggest disadvantage of all – the policy will not pay the death benefit if you die within the waiting period for any reason other than an accident.
A typical guaranteed issue life insurance policy has a waiting period of two years, though three years is not unusual.
Since the insurance company is issuing a policy on an applicant known to be in poor health, and likely to die at any time, they protect themselves by including the restrictive waiting period.
If this sounds at all unfair, understand that guaranteed issue life insurance is life insurance coverage for people who normally won’t qualify for coverage at all.
And as you can see, it has the most restrictive waiting period among life insurance policies.
Why You May Want Insurance with No Waiting Period
The whole purpose in obtaining life insurance is to have a death benefit available upon your death.
That can happen any time from the day after you accept your policy, up until 20 or 30 years later. But the point of having life insurance is to have financial resources available to your loved ones immediately.
For example, let’s say you’re a young adult with young children. You have limited financial resources, particularly with savings and investments, but substantial future obligations because of your children. A life insurance policy will give you the ability to provide several hundred thousand dollars in financial resources to take care of your children and family if you die within the next few years.
Obviously, a waiting period will completely offset that benefit.
You’ll be paying premiums – which will further reduce your asset base – but be unable to provide a death benefit for your family should you die within the first two years the policy is in force.
Fortunately, traditional life insurance policies will literally pay a death benefit as early as immediately after your policy is issued.
The only exception, as discussed above, will be if you failed to disclose a pre-existing health condition on your application, and that condition ended up being the cause of your death.
But otherwise, the life insurance company will pay the death benefit to your beneficiaries.
Is There Life Insurance With No Waiting Period?
Traditional life insurance doesn’t have a waiting period, other than the two-year period of contestability.
The bigger question is with guaranteed issue life insurance.
The whole point in taking guaranteed issue life insurance is to be able to provide for at least final expenses upon your death.
If you’re in poor health, death may certainly occur within the first two years the policy is in force.
After all, guaranteed issue life insurance is the type of policy often purchased by those who are terminally ill.
Some guaranteed issue life insurance policies offer a graded death benefit.
For example, the policy may pay between 30% and 40% of the full death benefit if you die within the first year the policy is in force. That may rise to 60% or 70% if you die in the second year, after which your beneficiaries will be entitled to 100% of the death benefit.
The graded death benefit doesn’t eliminate the waiting period, but it does at least provide partial benefits if you die within the first two years. However, not all life insurance companies offer a graded death benefit on their guaranteed issue life insurance policies.
If you don’t have a terminal illness, you’ll be better served by applying for a guaranteed acceptance life insurance policy.
Those typically required no medical exam, and either ask limited health questions or none at all. They’re often advertised on TV as being available for applicants between the ages of 50 and 85, with no medical questions.
This type of life insurance policy, though it does provide a limited death benefit much like guaranteed life insurance, has a much lower premium. And best of all, they sometimes (but not nearly always) come with no waiting period, other than the usual two-year period of contestability.
Unfortunately, guaranteed acceptance life insurance policies are not easy to find, at least not without the waiting period.
The best option:
Work with a life insurance broker, who works with dozens of life insurance companies, knows the ones that offer policies with no waiting period, and can help you get one at the lowest possible premium.
Waiting periods don’t generally apply to traditional life insurance policies (except for suicide or cases determined to be fraudulent).
But if you are in poor health, policies that are available typically do impose a waiting period.
It is possible to get coverage with a major illness, but the premium will be higher than if you accept a policy with the waiting period.
In addition, while you could be in poor health and get a guaranteed acceptance policy with no waiting period, you cannot have a terminal health condition.
Even though such a policy may not ask any health questions or require a medical exam, life insurance companies routinely check health databases, like the MIB, which is a repository for personal health information from hospitals, medical practices, clinics, labs, and pharmacies.
That information is used by the life insurance industry as a standard procedure. If any threatening health conditions come up during that search, you may either be turned down for the policy or required to take one that has a waiting period.
Once again, the best strategy is to work with a licensed insurance broker who can place your application with companies that specialize in guaranteed acceptance life insurance with no waiting period.