Some life insurance plans have what is called a “waiting period.” This is the time period between when you sign up for the plan and when it goes into effect. If you die within the window, your beneficiaries will receive nothing more than a refund for the premiums you have already paid. This is important to know as you plan how life insurance will affect your loved ones. Plus, life insurance is a part of your overall estate plan, which is an important financial process that shouldn’t be taken lightly. A financial advisor can help you create the right estate plan to meet all of your financial needs.
What is life insurance?
Life insurance is a form of insurance that aims to help take care of your friends or family after you die. With life insurance, you take out a policy at a certain sum assured and name one or more beneficiaries. You pay premiums, generally monthly or quarterly, 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’s 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 provide a $1 million payout to your spouse. If they too have passed, 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. However, unlike most forms of insurance, life insurance is not designed for you. Instead, it helps your loved ones. For example, it can help them pay for the costs associated with arranging your funeral, 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 purchasing life insurance, there are two general definitions of a waiting period, the pending application waiting period or the waiting period for the death benefit. Both have the same result in that the waiting period prevents the life insurance policy from paying benefits if something happens to you. Let’s take a closer look at how each works.
Waiting period of pending application
Almost all life insurance comes with a waiting period after your initial application. This is the time period between when you apply for your policy and when the insurance company approves it to begin coverage. This can take just a few minutes for an automated system, up to several weeks. During the application waiting period, you neither pay premiums nor have any type of coverage. If something happens to you during this waiting period, your beneficiaries will not collect anything.
Waiting period for death benefit
Some life insurance policies come with what is known as a death benefit waiting period. This is the time period between when the insurance company approves your policy and starts 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 payout based on a portion of the premiums you’ve already paid to date.
Why do plans have a waiting period?
There is an application waiting period to allow the company to determine if it wishes to issue insurance. The company uses this time to collect information about personal habits, such as if you are a smoker or heavy drinker. It will usually require a medical examination and any other data relevant to your actuarial life expectancy. Based on this information, the company determines your risk profile and life expectancy and sets its premiums accordingly.
In contrast, there is a waiting period for the death benefit to allow the insurance company to control the risk of short-term death. Most policies write a full waiting period of the death benefit, which means it applies regardless of the cause of death. However, the goal is to ensure that the company does not regularly write policies that must pay out immediately. In this way, it works similar to the clause in most contracts that prevents payment in the event of suicide. The company does not want to insure people who have reason to know that they will die soon.
After all
The life insurance waiting period is the window of time when your beneficiaries cannot collect the death benefits under your life insurance plan. Application waiting periods are the time between when you apply for insurance and when it is 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 usually standard, which should be included in your plans when purchasing life insurance.
Tips for buying insurance
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Helping your loved ones isn’t just about insurance. It’s about keeping yourself on a sound financial footing throughout your life, and you may need the help of an experienced professional, such as a financial advisor, to help you create the right plan. SmartAsset Free Tool matches you with up to three financial advisors serving your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you are ready to find an advisor who can help you achieve your financial goalsStart now.
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Like all insurance, life insurance is about risk management. In this case, however, you are managing the risk to your loved ones, not yourself. Learn more about how to determine how much coverage you need.
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