Frequently, you’ll see ads on television shows or magazines
popular with senior citizens for something called “guaranteed issue life
insurance.” Call this 1-800, they’ll say. “You can’t be turned down.”
Should you take them up on the offer? The answer, as with so
many other things, is ‘it depends.’
Purpose of Life Insurance
The primary purpose of life insurance is to provide a large
tax-free death benefit in the event of the death of the insured. Premiums are
usually small, compared to the death benefit. Life insurance can be permanent –
meaning that it will stay in force as long as you pay the premiums, no matter
how long the insured lives – or it can be temporary. Temporary coverage is what
we generally call term insurance.
Guaranteed issue life insurance will generally pay a death
benefit when the insured dies- provided the cause of death is not from an
excluded cause, and/or within a specific time frame. Those are big “ifs” in the guaranteed issue life
insurance business. The reason is that guaranteed issue policies are much more
expensive than standard policies that only get issued to people who meet the
basic medical qualifications. And so, thanks to a phenomenon insurance scholars
call “adverse selection,” people with health problems are much more likely to
sign up for these policies, while healthy people will find much cheaper
When you look at a guaranteed issue policy, pay careful
attention to the exclusions. In many cases, if you die of an illness within a
year or two, as opposed to an accident, your heirs won’t receive your full
death benefit you thought you paid for. Instead, they may simply receive a
refund of any premiums you paid in.
For example, you buy a guaranteed issue policy at 75 for
yourself and your spouse to cover final expense needs. One year later, you die
of a heart attack. The policy will likely not pay: They aren’t in the business
of insuring people with one foot in the grave, any more than your home
insurance carrier will write you a policy after your house has already caught
However, if you had passed on from a vehicular accident, the
policy will pay, no problem: Underwriters know you could not have reasonably
foreseen the accident.
Guaranteed issue policies are generally offered in fairly
low amounts – any more than $5,000 to $50,000 or so would become unaffordable
for the mass market. These policies aren’t designed to replace the income over
someone’s entire lifetime: Just to provide some quick cash for heirs to meet
final expenses, to fly loved ones in for services and the like.
Just because you have some health issues, don’t give up on
getting a standard policy. As the mortality rates for specific diseases
improves, more carriers have been liberal in underwriting. Many companies will
now issue policies to those with high blood pressure, diabetes and other health
conditions that would have been deal killers a generation ago.
Just because you have a health problem doesn’t mean you
can’t benefit from shopping around.
That’s where independent insurance professionals have an
advantage: Unlike captive agents, who are essentially obligated to only represent
one life insurance carrier, independent insurance professionals have more
freedom to “shop” your application around. So if you have some health problems,
independent life insurance agents can help you find a carrier that will give
you the very best deal – without consigning you to the expensive guaranteed
issue pool, with its significant exclusions on covering death as a result of disease.
Depending on your specific medical issues, it happens quite a bit.
An independent life agent also has more flexibility than
captive agents to explore other financial solutions with you as well, to
maximize your legacy to your heirs, or maximize your income while you are still
When You Need a Guaranteed Issue Policy
Sometimes people do need to get a guaranteed issue policy,
despite their high costs. This may be true if you expect your family will have
a pressing need for fast cash within days of your death – often to pay final
expenses and funeral costs, but also to fly in loved ones for services, or provide
for a cash bequest to a child or grandchild if another heir is receiving an important
heirloom, to even out the will, for example. Or you may anticipate a need for
cash to pay estate taxes or attorney’s fees, or pay off a debt.
If that’s the case, and you have significant medical issues
that make it impossible to get underwritten in any other way, an independent
insurance agent can help you assess your options.