Guaranteed Issue Life Insurance: An Alternative To Traditional Policies
Most financial advisors would recommend taking out life insurance by your mid-twenties. The younger and healthier you are when you shop for a policy, the cheaper it becomes in the long run. Despite that, many people choose to forego life insurance for three reasons:
They don't think they need it.
They can’t afford it.
They don’t qualify for insurance for health or other reasons.
If you have severe medical conditions and/or a smaller budget, options might seem scarce. Thankfully, there’s a potential solution: Guaranteed issue life insurance.
What Is Guaranteed Life Insurance?
Most people who apply for guaranteed issue life insurance get approved, regardless of financial status and physical health. If you don't meet the criteria to take out a traditionally underwritten policy, guaranteed life insurance can help cover end-of-life expenses.
Guaranteed issue life insurance approves all applicants as long as they are within the permitted age range. Also called final expense life insurance, it can help relieve funeral costs, medical bills, and other outstanding debts that your family would have to pay upon your death.
Other key features of guaranteed life insurance include:
Guaranteed issue policies offer coverage in units. A unit of insurance pertains to the covered item – such as funeral expenses – which is calculated according to state charges, reasonable profits, and risk adjustments.
An insurer determines how much coverage you are eligible for based on your age, sex, and where you live. If you're unsatisfied with your allotted death benefit, you can increase it by purchasing multiple units of coverage.
Some (but not all) guaranteed issue life insurance policies allow policyholders to build cash value, which they can access through a policy loan. However, if you fail to pay the loan back before you pass away, your beneficiaries won't receive the entire amount.
Premiums and Fees
The premiums you pay are determined by your age, sex, and other factors. Though insurers won’t strictly take into account your medical conditions, they may still end up charging you more for them. You might end up paying more for less since guaranteed issue insurance typically pays out lower benefit amounts.
Guaranteed issue life insurance policies can become expensive, especially considering how much you get in return. Unless you're suffering from extreme health conditions that will keep you from obtaining other types of insurance, you may want to get term or whole life insurance instead.
Like most traditional insurance policies, guaranteed issue life insurance provides a death benefit. This is typically between $2,000 to $25,000 – significantly lower than the death benefit of other policy types.
Insurers use a grading system to determine the value of the payout. For example, if you die from natural causes within the first 2 - 3 years of an active policy, your insurer will only pay out 110% to 120% of the premiums already paid.
For accidental deaths, your insurer will cover the full face amount only after the waiting period. Beneficiaries can receive up to 60% of the face amount if you die in an accident within three years. The full benefit is only paid out for accidental deaths after four years.
Pros & Cons
Guaranteed issue life insurance’s primary selling point is that you can't be turned down for it. However, this life insurance policy often comes with a catch. We break down the pros and cons below.
The application is quick, easy, and provides near-guaranteed acceptance. Guaranteed issue policies are more forgiving of severe health conditions compared to other traditional policies.
There is hardly any underwriting delay. You can qualify for guaranteed acceptance within 1-2 days of applying. Some even offer same-day approvals.
Applicants won't have to undergo a medical exam or answer any health questions.
It provides an adequate death benefit for surviving family members.
It makes for a suitable alternative if you have no access to a traditional whole life insurance policy.
You can leave a fair death benefit to beneficiaries even with a less-than-stellar financial history.
Despite high fees and premiums, the death benefits aren't very substantial.
Guaranteed issue life insurance won't give the full face amount if you die within two to three years of purchasing the policy, unless you die in an accident.
Despite its supposed guaranteed acceptance policy, your application can still be rejected if you suffer from a terminal illness, an incurable condition (e.g. HIV/AIDS), or live in a nursing home.
When Should You Apply?
You should apply for a guaranteed issue if you want to provide end-of-life funding for beneficiaries but can’t secure a traditional policy. If you don't have any other options, guaranteed issue life insurance can provide some coverage. Here are a few scenarios in which guaranteed issue life insurance might make the most sense:
You Suffer From A Medical Condition
Certain medical conditions make it impossible to obtain other types of insurance. If you're in poor health or are otherwise considered high-risk, traditional plans are far less affordable. This includes people who suffer from serious health problems like cancer.
You Work A Dangerous Job
High-risk doesn't only refer to those with chronic or incurable conditions. Individuals who work in dangerous professions such as in skydiving or deep-sea diving could also benefit from a guaranteed issue policy.
You Don't Have The Budget For Other Insurance
Simply put, whole life insurance policies are costly, especially if you’re older or have pre-existing medical conditions. Guaranteed life insurance policies offer low premiums and are manageable for individuals on a budget. And since there’s no medical exam, it’s one of the few policy options that don’t price out people with health issues.
How To Secure A Policy
Like its traditional counterparts, guaranteed issue life insurance policies are directly available from the company offering them. Rates are calculated based on only three primary factors, so you can get a pretty accurate quote from online insurance quoting tools.
Once you have a quote, you will have to fill out a standard application form. There’s no need to answer any health questions or provide your medical history. If the broker or agent wants to verify that you don't suffer from a disqualifying condition (e.g. a terminal illness), they may call you before approving your application.
Because there is no required medical exam, you'll find out if you’re approved quickly. If you are, just sign the form, return the policy, and pay your first premium to start getting coverage.
Alternatives to Guaranteed Issue Life Insurance
Many people will take out guaranteed issue life insurance only as a last resort. If you’re not limited by health status or budget, the following policies may better suit your needs.
Term Life Insurance
If you're under the age of 65, some independent brokers may be willing to overlook health concerns and offer you a term life contract. Term life insurance provides coverage for a specific period, usually up to 30 years. Term life typically provides a death benefit of at least $250,000.
Term life policies give you more control over the coverage you need. Should you decide that you need more coverage, you can request a term life rider. This lets you convert your term insurance to a whole life policy, allow beneficiaries to access death benefits early, or get some of your premiums back if you outlive your plan.
Funeral Insurance Or Funeral Home Contracts
If you're only looking to cover funeral costs, you can purchase guaranteed life policies directly from a funeral home or director. With this type of policy, your funeral director is listed as the sole beneficiary. This allows you to discuss arrangements in advance and ensure that the benefit goes towards its intended purpose.
With a life insurance policy, your beneficiaries decide how the payout is used. A funeral home contract puts payments directly toward future funeral expenses. Just keep in mind that if you die before paying the services off, your family or estate will have to cover the difference.
Is It Worth It?
Is guaranteed issue the right choice for you? It ultimately depends on your personal circumstances. Generally, you'll want to consider a guaranteed issue policy if you've already exhausted your options.
You'll also have to account for your age and overall health. If you're terminally ill or over the age of 65, you may not get approved despite the “guaranteed” acceptance. And if you’re in slightly better health, you have to live past the graded benefits period to ensure that your beneficiaries receive the full death benefit. Otherwise, your high premiums will go to waste.
If you're only looking for ways to pay off final expenses, funeral insurance may be a more appropriate choice over a guaranteed issue policy. The death benefit covers specific services that you pre-arrange with a funeral director.
However, if you're also hoping to leave your next of kin with a little bit of inheritance, a term life insurance guarantee can set them up with a small amount.
Can you have multiple active policies?
You can take out as many life insurance policies as you want, as long as you qualify and can afford all of the premiums.
Is it possible to be denied this type of insurance?
Yes. An insurer can decide not to approve your application under the following circumstances:
You suffer from a terminal illness.
You have AIDS or HIV.
You reside in a nursing or elderly home.
You currently need or have undergone an organ or tissue transplant.
You're currently undergoing dialysis.
You have a specific type of cancer.
You have Alzheimer’s, Dementia, or a related condition.
You suffer from a chronic or debilitating illness that binds you to a wheelchair.
Where can you get guaranteed issue insurance?
You can purchase this policy from any trusted insurance company, though it may not be available in every state.
How long does it take to approve a guaranteed issue insurance application?
Guaranteed issue policies don't take a lot of time to activate. Typically, the waiting period lasts only 48 hours. Because there are no health questions to ask and evaluate, some insurance companies will complete the underwriting process on the same day.
It's important to keep in mind that your policy has a graded benefit period. Your beneficiaries won’t get the full death benefit if you pass away during this period.
Can you cash out on your policy?
Unlike whole life insurance, this life insurance policy doesn't offer a savings component or cash value – only a fixed amount.
How is this life insurance policy different from conventional whole life insurance?
Guaranteed policies are more forgiving of applicants who pose a moderate to severe health risk. Unlike traditional whole life insurance, you aren’t required to undergo a medical exam or answer any invasive health questions.
How much coverage can I get?
With guaranteed issue life insurance, there’s a maximum benefit of $25,000 – significantly less than that of a whole life insurance plan. The average payout amounts to just $4,000.
Are guaranteed issue life insurance and burial insurance the same thing?
No, burial insurance is a form of life insurance. It guarantees a smaller amount of coverage, up to $10,000. If you’re applying for individual burial insurance, your policy provider may ask that you answer a few health questions.
Guaranteed life insurance is an appropriate solution for individuals without options for traditional policies. However, whether it’ll best satisfy your objectives is something you should discuss with a financial advisor. Contact one of our experts at Wesley LLC to find out which life insurance policy will cater to your needs.