Perhaps you've seen ads for guaranteed issue life insurance. The message is always the same; "Get approved for guaranteed issue life insurance with NO medical exams and NO medical questions!" But how much guaranteed coverage can you really get from guaranteed issue life insurance? What makes guaranteed issue life insurance different, and are there other available options?
Why it's different
A guaranteed issue life insurance policy will insure whoever applies for it, no questions asked. It's different from life insurance that advertises "no medical exam," because the life insurance company could still turn you down for those policies based on health and eligibility questions you answer.
Typically, guaranteed issue life insurance is marketed to senior citizens or those with medical problems. Since the insurance company assumes you are much more of a risk, the coverage and premiums will reflect that. You generally can't purchase more than $20,000 of coverage, and premiums are higher than normal.
Available options and risks
Insurance companies base your rates on your age and medical information, so it usually makes sense to buy traditional life insurance if you can pass a medical exam and answer health questions. You will probably pay less and have better coverage.
What makes guaranteed issue policies risky is that, because of the high premium cost and low coverage amount, you could pay more in premiums than your beneficiaries will see in death benefits. Some states have adopted laws requiring the life insurance company to notify you prior to purchase of the time it takes to reach this point, but some have not.
How the insurance company prevents fraud
Some life insurance companies added a "graded benefits clause" to guaranteed issue life insurance policies to protect themselves from fraud. Graded benefits clauses state that if the policyholder dies within two to three years of buying the policy, the company will refund the premiums paid, plus interest, instead of paying out the death benefit. This prevents people from purposely buying a policy just before their death. As with all types of insurance, guaranteed issue life insurance can't be used to pay for something that's about to happen. A few companies may pay out full death benefits in the event of an accidental death – but the definition of accidental death is very limited.
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Originally posted September 17, 2004.
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