Guaranteed issue life insurance is often targeted towards two types of people: seniors and people with serious health problems. For these groups, term life insurance may be prohibitively expensive, or even unobtainable. However, there is no hard and set rule as to when you should buy guaranteed issue life insurance instead of term life insurance. Instead, you should compare all of your options, including a savings account or funeral prepayment plan, before making a decision.
If you’re considering guaranteed issue life insurance, read this article to make sure it makes sense for you and get a full picture of the pitfalls to avoid.
What is guaranteed issue life insurance?
Guaranteed issue life insurance is a type of life insurance policy that does not require a medical exam. There’s no expiration date for a guaranteed issue life insurance policy – as long as you can pay for it, you can keep the policy.
Guaranteed issue life insurance is primarily marketed as affordable life insurance for seniors and sold as a cheap way to leave children and grandchildren a small inheritance or cover funeral fees.
If you’ve ever watched daytime television, you’ve probably seen this Colonial Penn commercial:
Colonial Penn’s representative, TV host Alex Trebek, tells men and women ages 50 - 85 that they should check out guaranteed issue life insurance through Colonial Penn. He promises that there will be no medical exam, and that you will not be turned down because of your health. He also guarantees that your rate will not increase as you age. He also promises that you can get coverage for 35 cents a day.
The reason Alex Trebek can promise you a rate of 35 cents per day, or $9.95 per month, is that Colonial Penn always prices their units of coverage at $9.95. Let me explain in plain English:
With a typical term life insurance policy, you’re buying "units" of $1,000 of coverage. Your personal information – age, weight, height, and health history – decides what you’ll pay for that unit of coverage. Let’s say you had a term life insurance policy with $500,000 worth of coverage. You pay $60 per month for this policy. Behind the scenes, the life insurance company has priced you at 12 cents per unit of coverage ($1,000); 500 units times 12 cents is $60 per month.
Guaranteed issue life insurance works the opposite way. You’ll always pay $9.95 per unit of coverage. However, the amount of coverage in that unit changes depending on your age and location. Let’s look at an example. A 60-year-old male in California will pay $9.95 for one unit of $1,214 worth of coverage from Colonial Penn. If that same man buys Colonial Penn guaranteed issue life insurance at age 75, he’ll pay $9.95 for only $560 of coverage.
Like all life insurance policies, guaranteed issue life insurance pays out to beneficiaries when the policy owner dies. Your policy’s payout will depend on how many units of coverage you purchase. Let’s say the 75-year-old man above buys five units of $560 worth of coverage. For about $50 per month, his beneficiaries will get a payout of $2800 when he dies. A few important things to note: this man needs to be actively paying for the policy when he dies in order for his beneficiaries to receive the policy and he needs to have owned the policy for at least two years for his beneficiaries to receive the full benefit. If you die before that two anniversary, your beneficiary will receive a significantly reduced benefit or just get a refund of the premiums paid.
When is guaranteed issue life insurance better than term life insurance?
Guaranteed issue life insurance is usually only looked at by two types of people: elderly people past retirement age and people who have a serious health problem.
Term life insurance can be prohibitively expensive for both of these groups of individuals. Even if you’re healthy, life insurance gets more expensive as you age. Just take a look at this chart from our article, "Am I too old to get life insurance?"
This chart shows the cost of a $500,000 policy for a 175-pound man in good health, starting at age 30 and continuing to age 80.
Once you add in health issues on top of your age, a term life insurance can become costly. However, before looking at guaranteed issue life insurance, we would strongly suggest getting a term life insurance quote. It is completely free, and you may be surprised to find that there are affordable options. Every life insurance company prices out age and medical conditions differently, so there may be a company that fits perfectly with your profile.
How is guaranteed issue life insurance different than simplified issue life insurance?
Simplified issue life insurance, often called "no exam" life insurance, is another type of life insurance that doesn’t require a medical exam. Simplified issue does, however, require that you fill out a medical information form. Simplified issue exists somewhere between term life and guaranteed issue life insurance – it’s more expensive than term life, but because it is based on some medical information, it’s less expensive than guaranteed issue life insurance.
Simplified issue life insurance may make sense for you if you’re older, but relatively healthy. If your term life insurance quote is costly, ask your agent about a simplified issue life insurance policy.
How is guaranteed issue life insurance different than guaranteed universal life insurance?
Despite having similar names, guaranteed universal life insurance (GUL) is a very different product than guaranteed issue life insurance. Unlike guaranteed issue life insurance, GUL requires that you take a medical exam. GUL policies allow you to set a specific age that the policy will expire at – i.e. age 90, 95, 100, and so on. The older the age that the GUL policy is set to expire at, the more expensive the policy will be. GUL policies are generally less expensive than other types of permanent life insurance (like whole life insurance), but more expensive than term life insurance or a small guaranteed issue life insurance policy.
When shopping for guaranteed issue life insurance (or a GUL policy), make sure you don’t accidentally apply for the wrong type of "guaranteed" life insurance.
Pitfalls of guaranteed issue life insurance
If term life insurance is prohibitively expensive and you’re looking at guaranteed issue life insurance as an alternative, there are a few things you need to know.
First: if you die within two years of buying a guaranteed life insurance policy, you may not get the full death benefit amount. Colonial Penn and other guaranteed life insurance providers will instead refund the premiums you’ve already paid. That’s better than losing the money, but it’s not the same as getting the full death benefit.
You should also be aware that guaranteed issue life insurance isn’t your only option. A high-yield savings account or CD account may be a better option, as these cost you nothing and may earn you a small interest over the course of a few years. You can also prepay your funeral expenses by working out an arrangement with your local funeral parlor, or look at final expense insurance.