What Is Modified Whole Life Insurance?

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  • Modified whole life insurance, which offers lower initial premiums, may be ideal for some buyers. Discover the pros and cons of alternatively structured plans.

If you’re shopping for an affordable life insurance policy, you may have considered a modified whole life plan, which offers lower premiums for the first few years you own the policy. Although modified life insurance coverage may be ideal for some purchasers, it can be more expensive in the long run, so you should know the basics of these policies prior to signing a contract. So, what is modified whole life insurance, and is it right for you? Let’s take a deeper dive into the pros and cons of this coverage.

What Is Modified Whole Life Insurance?

Unlike term life insurance, which only provides financial protection for a predefined period of time, whole life insurance is permanent coverage that guarantees a payout regardless of when the insured dies. Modified whole life insurance is a type of whole life coverage that offers an alternative premium structure to purchasers who wish to lay out less money for premiums in the first few years of the policy.

When you purchase a traditional whole life policy, the premiums and the death benefit are typically locked in once you sign the contract, so they won’t change, regardless of how long you have the policy. If you choose a modified whole life policy, however, the death benefit remains the same over the lifetime of the plan, but the premium changes after a specified amount of time. For most modified life insurance plans, this premium increase only happens once and typically occurs anywhere between 2 and 10 years into the policy’s lifetime.

Modified whole life insurance may also be referred to as graded life insurance or modified-premium life insurance. Some carriers may also offer modified term life insurance, which offers a similar alternative premium payment structure for a policy that provides coverage over a predefined term.

The Pros and Cons of Modified Whole Life Insurance

Modified whole life insurance may appeal to individuals seeking an affordable option for life insurance coverage, particularly if they anticipate an increase in their income in the upcoming years. However, this type of policy has both advantages and disadvantages that should be considered prior to signing a contract.

Advantages of Modified Whole Life Insurance

Modified whole life insurance policies have several main advantages, which may make them appealing to certain buyers, including:

  • Minimal underwriting: Most carriers use a limited medical underwriting process, or none at all, to approve applicants for modified whole life insurance, so you may find it easier to buy this type of coverage if you have serious health issues that could hinder your approval through standard plans.
  • Lower up-front costs: Modified whole life insurance policies charge lower premiums for the first few years of the policy. This may make them ideal for individuals who anticipate an increase in their income over the coming years.
  • Uniform value: Despite lower initial premiums, the death benefit doesn’t change over the life of a modified policy.
  • Lifetime coverage: Modified whole life insurance provides coverage for the entire lifetime of the insured, so you won’t have to worry about leaving your beneficiaries financially unprepared.

Disadvantages of Modified Whole Life Insurance

Modified plans also have several large drawbacks that may be red flags for some potential purchasers.

  • Increased complexity: Because modified whole life insurance plans use alternative premium payment structures, contracts may be more complex than those of standard plans.
  • Waiting periods: Some whole life insurance plans institute a two- to three-year initial waiting period before the carrier will pay out a death benefit for a non-accidental death. If the insured dies during this waiting period, the carrier typically refunds any premium payments plus interest at a predetermined rate. After the waiting period ends, the full benefit amount is payable upon the death of the insured, regardless of the reason.
  • Delayed cash value accumulation: Whole life insurance policies typically include a cash value component. However, because modified whole life plans have lower initial premiums, a cash value may not begin to accumulate until the premiums increase.
  • Overall expense: Modified whole life plans may appear to be more affordable than traditional plans, but the steep increase in premiums that occurs later in the life of these plans may make them more expensive overall.

Modified Life Insurance: Whole vs. Term Policies

Although most modified life insurance coverage consists of whole life plans, term policies are also available. Both types of modified plans maintain a steady death benefit despite changing premium amounts. However, unlike whole life policies, which last for the lifetime of the insured, term policies expire after a predetermined amount of time, as specified in the contract. Term policies also don’t typically include a cash value component.

Who and What Is Modified Whole Life Insurance Good For?

Although modified whole life insurance policies may seem like a good option to buyers looking to lay out less money initially, most buyers who want affordable life insurance coverage are better off choosing a term plan or a whole life policy with a lower death benefit. Modified whole life insurance policies are typically only a good choice for individuals who want a permanent policy with a substantial death benefit and who anticipate an improved financial situation that should allow them to afford higher premiums at a future time.

If you’re considering a modified whole life insurance policy, it may be worth consulting a knowledgeable financial advisor who can help you explore your options before signing a contract.