The basics of guaranteed issue life insurance

You've seen the ads on TV: Celebrities tell you about a life insurance policy with no medical exam. For some, "guaranteed issue" and "guaranteed acceptance" individual life insurance may be the only way to acquire coverage.

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"A true guaranteed issue policy doesn't require you to answer any medical questions."

Often marketed to the elderly and those with serious medical conditions, guaranteed issue individual life insurance will insure anyone who comes along, with no medical examination and few or no medical questions. These policies should not be confused with "simplified issue" or "quick issue" individual life insurance, which ask some medical questions but also will not require an examination.

"There are some 'easy to get' life insurance policies that are often confused with guaranteed issue," says Paul Graham, chief actuary with the American Council of Life Insurers (ACLI). "A true guaranteed issue policy doesn't require you to answer any medical questions."

What's the catch? There are a few, says Graham.

“Guaranteed-issue life insurance policies are sold without medical underwriting, but there are limitations. Most of these policies have small face values, usually less than $20,000. This is because guaranteed issue policies are designed for a specific purpose, which is to pay for funeral expenses. Additionally, some insurers may offer guaranteed issue policies only to a small universe of consumers, such as those between ages 50 and 85," he says.

And if you want a payment plan, such as quarterly or semi-annual bills, you'll likely pay more.

Also, because guaranteed issue life insurance polices do not rely on medical information to set premiums, the cost tends to be very high.

With guaranteed issue life insurance policies, because there is no medical exam or underwriting, insurance companies have no information other than the applicant's age and gender on which to base the premiums.

The high premiums, combined with a low face amount for the death benefit, make guaranteed issue life insurance a less desirable option for relatively healthy individuals. For some of these policies, you could end up paying more in premiums than your beneficiaries will receive upon your death.

Make sure you do the math to figure out how much you'll have paid out into your guaranteed issue policy in five, 10 or 15 years. Don't assume that your agent will tell you that you may pay more in premiums than your beneficiaries will get back in death benefit; very few states have laws that require this disclosure.

The National Association of Insurance Commissioners (NAIC) has developed a model law that states can use regarding disclosures for small face amount policies, such as guaranteed issue policies. The model law recommends that insurers issuing small face amount policies "clearly and prominently disclose . . . the length of time until the cumulative policy premiums paid may exceed the face amount of the policy."

The NAIC model law also includes a provision that would let you cancel the policy within 10 days for a full refund. Some states already have laws that require "free look" periods for life insurance. So, if you buy a guaranteed issue policy and have instant regrets, you may be able to back out of it if you act quickly.

The first years

The final catch, according to Graham of the ACLI, is a concept called "graded benefits." Introduced to reduce insurance fraud, a graded death benefit policy pays out only a portion of the death benefit if you die within the first several years of the policy. Check the policy details for a schedule of how the benefit amount is graded.

"All of these limitations help prevent adverse selection, i.e. people that know that they are dying soon will buy as much insurance as they can, and these limitations limit the financial risk to the insurer of that occurring,” says Graham

Insurers couldn't offer guaranteed issue policies without this protection, he says.

Some policies will pay out the full-face amount during the graded benefits period in the case of an accidental death (such as a car crash), but not all guaranteed issue policies offer this feature and the definition of "accidental causes" is usually quite limited.

Overall, even if you have some health problems you will likely pay less for an underwritten policy than a guaranteed issue policy.

If you've been turned away from every other policy because of your age or your health, and you really need to pass on a benefit to your beneficiaries, guaranteed issue individual life insurance can be a last resort.

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