What is guaranteed issue life insurance?

Guaranteed issue life insurance allows you to avoid a health exam or answer health-related questions. Regular life insurance policies require you to get checked out by a doctor and answer questions about your health.

That’s fine if you’re healthy. If you have health concerns though, answering those questions and a medical exam could cause an insurer to reject you.

Guaranteed life insurance makes it easier for people who otherwise wouldn't qualify to get a policy. The downside is that guaranteed issue life insurance has much higher premiums since insurers are taking on more risk.

Who should get guaranteed issue life insurance?

Guaranteed issue life insurance typically is best suited for people who aren't in the best of health or are at an advanced age. Insurers would place these people in a higher risk pool.

Ben Brown, president of BurialPro.com, a company that provides final expense life insurance, says healthy people can get better rates and more coverage by getting a regular life insurance policy.

"I only recommend these plans to individuals who can't qualify for traditional coverage,” Brown says.

What's the difference between guaranteed issue life and simplified issue life?

Simplified issue life insurance is another option for people who aren't in the best of health. Simplified issue applications ask health questions. There are no health questions for guaranteed issue. 

"With guaranteed issue plans, the insurer knows nothing about the health of their applicants. For that reason, they are taking on much more risk compared to policies that do evaluate health. Since their risk is higher, they must charge more for insurance to make the product viable financially," says Anthony Martin, owner and CEO of Choice Mutual, which offers burial insurance.

"A simplified issue product will ask health questions and analyze someone's prescription history. This means there is a good amount they do know about an applicant's health, which translates into lower risk. Lower risk means they can charge less for the insurance,” Martin says.

What are graded death benefits?

One important thing you should know before signing up for guaranteed issue life insurance is that most, if not all, of these policies feature something called a graded death benefit.

With a graded death benefit, an insurer will only pay out a portion of the policy if you die within the first two to three years.

This stipulation prevents insurance fraud by discouraging people who know they have a terminal illness from signing up for a policy to get a quick payout. Since guaranteed life insurance doesn't involve medical underwriting, a graded death penalty limits insurers’ financial risks.

You should keep this in mind if you're in poor health or have a terminal illness, but want to get a life insurance policy. Avoiding a medical exam and sidestepping health questions may still not result in a death benefit if you get a guaranteed policy, but die within the graded death benefits period. 

Pros and cons of guaranteed issue life insurance

Along with the graded death benefit, cost is one of the biggest disadvantages of guaranteed issue life insurance.

These policies typically can cost an incredible 500% more than simplified issue life insurance.

Guaranteed life policies also offer a lower payout than traditional policies, including whole life, and term life insurance, which provides coverage for anywhere from a 10- to a 30-year term and a death benefit to beneficiaries. Whereas whole or term life insurance may come with a six-figure death benefit, a guaranteed life policy may offer a benefit that's in the low five-figure range -- typically around $20,000.

Despite the lower payout, a guaranteed issue life policy can be beneficial if your family needs help paying for funeral expenses or other end-of-life costs. The other benefit is that this insurance gives more people the opportunity to qualify for coverage. If you can't get a traditional policy, guaranteed life insurance can at least fill part of your coverage gap -- however small.

Alternatives to guaranteed issue life insurance

Guaranteed issue life policies are expensive. What can you do instead of buying a guaranteed issue policy?

  • Employer-provided group life insurance can give you a policy for free or a reduced rate. That’s because the insurance company has lowered their risk by pooling together coverage across many employees.
  • Savings and investments can grow your money to provide an inheritance or pay for final expenses, and may be a better place to put those premium payments if you're young enough to grow the account over time.
  • Annuities offer both retirement income and a death benefit.
  • If paying for funeral costs is your main concern, consider a pre-need policy with a funeral home to pre-pay your expenses.

How to buy guaranteed issue life insurance

If you're considering guaranteed issue life insurance, make sure you:

  • Get quotes from several different companies and compare them with the coverage offered.
  • Weigh the policy amount against the monthly premium.
  • Check the policy details for a schedule of how the graded death benefit works.
  • See how much your survivors can expect to receive if you pass away during the first few years of the policy.

"Typically, the only ‘fine print’ surprises are the graded benefit or policy exclusions. These should be expected with guaranteed or simplified issue policies," says Rob Drury, executive director of the Association of Christian Financial Advisors, the country's largest nonprofit network of financial professionals.

Once you find a policy with a monthly premium, you can afford for the level of coverage you can live with, sign up to secure the policy. Although the guaranteed issue life coverage may be less than you'd like, leaving your survivors with even a small five-figure sum might give you some peace of mind.