Waiting periods and graded death benefits

What it is

A waiting period is a defined stretch at the beginning of a policy during which the full death benefit is not payable if death results from illness or natural causes. It is also called a graded benefit period or a deferred benefit period.

It exists on products that were issued without assessing your health. An insurer that asks no medical questions has no way of knowing whether an applicant received a serious diagnosis last week. The waiting period is what makes that acceptable risk, and without it these products could not be sold at all.

Fully underwritten policies generally do not use this graded-benefit design. Check the contract for other exclusions and conditions rather than assuming every cause of death is covered.

What is paid depends on the cause of death and the timing:

The two designs

They are not the same, and the difference matters at a claim.

Return of premium. If death from natural causes occurs during the waiting period, the policy returns the premiums that were paid, often with a modest amount of interest added. The family gets back what was put in rather than the death benefit.

Graded percentage. The policy pays a proportion of the death benefit, which increases with each year in force. A design might pay a quarter of the benefit in year one, half in year two, and the full amount from year three.

Which design a policy uses is in the contract. Ask specifically, because advertising for these products often refers to a waiting period without saying which shape it takes.

Accidental death

On most policies with a waiting period, death by accident is covered in full from the first day.

Accidental-death benefits are a separate contractual provision. Their definitions and exclusions still apply, even when there is no initial waiting period for that benefit.

How “accidental” is defined varies, and it is a defined term in the contract rather than an ordinary word. It is worth reading, particularly if there is any question about what would and would not qualify.

Not the same as contestability

These two get confused constantly, and both can apply to the same policy at the same time.

A waiting period limits what is paid for natural-cause death in the early years. It applies regardless of anything you did or said. It only exists on certain no-medical products.

The contestability period is the first two years of any Canadian life policy, during which the insurer can compare your application against your medical records if a claim is made, and can reduce or refuse the claim if something material was misstated. It applies to every policy, including fully underwritten ones. See the contestability period.

So a guaranteed issue policy in year one has both: a limit on what is payable for illness, and the insurer’s right to examine the application. A fully underwritten policy in year one has only the second.

There is also a suicide clause on essentially all Canadian life policies, under which death by suicide within the first two years generally returns premiums rather than paying the benefit. That is separate again.

What it means for the decision

Consider what your family would receive if a claim occurred during the waiting period. Your current health does not remove that limitation or predict whether it will matter.

If you are buying it because you have received a serious diagnosis, the waiting period is the whole story, and it is essential to understand exactly what would be paid. The honest position is that these products are not designed to be bought after a terminal diagnosis, and the waiting period is what enforces that.

Either way, the questions are the same:

• How long is the period?
• Is it return of premium, or a graded percentage?
• If graded, what percentage applies in each year?
• Is accidental death covered in full from day one, and how is accidental defined?

Any advisor should answer all four from the contract, not from memory.

Where it should not appear

Fully underwritten coverage should not have one. If a fully underwritten policy is being presented with a waiting period attached, ask why.

Many simplified issue products also pay in full from day one, because the health questions gave the insurer enough information to price the risk. That is one of the clearest advantages simplified issue has over guaranteed issue, and it is a reason to try the simplified route first.