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Life insurance is out of reach for many Americans because of poor health or a pre-existing condition that makes them too risky for a life insurance policy. However, guaranteed issue life insurance could be the best option for people struggling to get life insurance.

Here's what you should know about this type of life insurance.

  • People in poor health or struggling with pre-existing conditions can opt for a guaranteed issue life insurance policy to avoid answering questions about their health or submitting to a medical exam.
  • The downside of this policy is that it has much higher premiums since insurers are taking on more risk.
  • Guaranteed issue life insurance offers a graded death benefit in which an insurer will only pay out a portion of the policy if you die within the first two to three years.
  • Alternatives to guaranteed issue life insurance are final expense insurance and employer-provided group life insurance.

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 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. Insurers would place these people in a higher risk pool, including the elderly or those with severe health conditions.

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 about guaranteed issue life insurance.

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. Guaranteed issue life insurance is somewhat similar to simplified issue life, but differs in one key way. 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 adds.

How graded death benefits affect payout

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.

The experts we spoke to said these policies typically can cost 500 percent more than simplified issue life insurance.

Guaranteed life policies also offer a lower payout than permanent life, 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.

To review, here are the pros and cons of guaranteed issue life insurance:

  • Pro -- Guaranteed coverage for people with poor health
  • Cons -- Higher premiums, graded death benefit, lower payout

Alternatives to guaranteed issue life insurance

Guaranteed issue life policies are expensive. There are other avenues if they’re beyond your means: final expense insurance or group life insurance:

  • Final expense insurance, or burial insurance, provides a lower payout than traditional life insurance. Policies come in simplified issue or guaranteed life form, which means you won't need to undergo a medical exam and you may not have to answer health questions, depending on which policy you apply for. Final expense insurance typically offers benefit amounts ranging from $5,000 to $50,000, and you can get either a term life policy or a whole life 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.

These are both low-cost solutions, but have limited payouts.  

How to shop around for 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 measure of financial peace of mind.