Some life insurance plans have what’s called a “waiting period.” This is the window of time between when you enroll in the plan and when it takes effect. If you die within the window, your beneficiaries will receive nothing more than a refund on the premiums you’ve already paid. This is important to know as you’re planning out how life insurance will impact your loved ones. Plus, life insurance is one piece of your overall estate plan, which is an important financial process that shouldn’t be taken lightly. A financial advisor can help you craft an estate plan that will help you meet your financial needs and goals.
What Is Life Insurance?
Life insurance is a form of insurance intended to help take care of your friends or family after you die. With life insurance, you take out a policy in a given coverage amount and name one or more beneficiaries. You pay premiums, generally either every month or every quarter, based on mortality-related factors such as age and health. When you die, the insurance company issues a payment to your beneficiaries in the amount of your policy coverage.
For example, say you take out a $1 million life insurance policy and name your spouse as your beneficiary. At the time of your death, the insurance company will issue a payment of $1 million to your spouse. If they, too, have passed on, the insurance company will issue that payment to their heirs.
Like other forms of insurance, life insurance is designed to help pay for unexpected expenses. Unlike most forms of insurance, though, life insurance is not intended for you. Instead, it helps your loved ones. For example, it can help them pay for costs associated with your funeral arrangements, or it can also help partners and dependents replace your income if you had a job when you died.
What Is a Waiting Period?
When it comes to buying life insurance, there are two general definitions of a waiting period, the pending application waiting period or the death benefit waiting period. Both have the same result in that the waiting period prevents the life insurance policy from paying out the benefits if something happens to you. Let’s take a closer look at how each one works.
Pending Application Waiting Period
Virtually all life insurance comes with a waiting period after your initial application. This is the period of time between when you apply for your policy and when the insurance company approves it to begin coverage. This can take as little as a few minutes for an automated system, up to several weeks. During the application waiting period, you neither pay premiums nor have any sort of coverage. If something happens to you during this waiting period your beneficiaries will not collect anything.
Death Benefit Waiting Period
Some life insurance policies come with what is known as a death benefit waiting period. This is a window of time between when the insurance company approves your policy and begins collecting premiums and when your beneficiaries are eligible to receive death benefits. If you die within the death benefit waiting period, your beneficiaries will not receive the death benefits under your policy. Instead, most policies will issue a payment based on some proportion of the premiums you had already paid to date.
Why Do Plans Have a Waiting Period?
An application waiting period exists to let the company determine whether it wants to issue insurance. The company uses this time to gather information on personal habits, such as if you are a smoker or heavy drinker. It typically will ask for a medical exam and any other data relevant to your actuarial life expectancy. Based on this information, the company decides your risk profile and life expectancy and sets its premiums accordingly.
By contrast, a death benefit waiting period exists to let the insurance company control the risk of near-term death. Most policies write a blanket death benefit waiting period, meaning that it applies regardless of the cause of death. However, the purpose is to make sure that the company doesn’t regularly write policies it has to immediately pay out. In this way, it works similarly to the clause in most contracts that prevents payment in case of suicide. The company does not want to insure people who have reason to know they will die soon.
The Bottom Line
A life insurance waiting period is the window of time when your beneficiaries cannot collect death benefits under your life insurance plan. Application waiting periods are the time between when you apply for insurance and when it’s approved, while death benefit waiting periods are the time between when you receive coverage and when your death benefits apply. Having some type of waiting period is typically standard, which should be factored into your plans when buying life insurance.
Tips for Buying Insurance
- Helping your loved ones isn’t just about insurance. It’s about keeping yourself on a sound financial footing throughout life your life, and you may need the help of an experienced professional, like a financial advisor, to help you create the right plan. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Like all insurance, life insurance is about managing risk. In this case, though, you’re managing the risk to your loved ones, not yourself. Learn more about how to determine the amount of coverage you need.
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