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Guaranteed Life Insurance

The idea of guaranteed life insurance is an appealing one. Who doesn’t like the sound of a guarantee? Plus, guaranteed life insurance doesn’t require a medical exam during the underwriting process, making it an enticing option for the elderly and people in poor health. But before you go seeking out life insurance quotes, let’s review the details of guaranteed life insurance.

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 Guaranteed Acceptance Life Insurance: The Basics

We usually think of life insurance as a product designed to cover young and middle-aged people who have jobs and families, replacing the policyholder’s income. Guaranteed life insurance, by contrast, is often marketed to seniors. Older folks might worry about leaving their kids with the burden of paying for a funeral, or they might want to create a modest inheritance through a life insurance policy. Alternatively, they may be drawn to the advertising campaigns for guaranteed life insurance, which feature smiling silver foxes.

Guaranteed acceptance life insurance offers coverage, but not much of it. Applicants generally won’t be able to get six-figure policies (for that kind of coverage, you’ll need to submit to a medical exam). With its low death benefits, you might think that guaranteed life insurance would come with low premiums, too. Not so. Premiums for guaranteed life insurance tend to be high, and can even top the value of the death benefits over time. That’s a big drawback.

Find out now: Do I need life insurance? 

Turned Down for What?

Life insurance companies market guaranteed issue life insurance policies by promising that all applicants are guaranteed to have their applications approved. In practice, it’s more like “most” applicants. For example, folks living with HIV/AIDS will have their applications turned down, as will those who have been diagnosed with a terminal illness, or who are currently receiving long-term in-home or institutional care.

Life insurance companies assume that the people who want guaranteed life insurance are old and/or unwell, and so are more likely to pass away, triggering a payout. That’s why the premiums are higher, and why people with some of the highest mortality risk aren’t eligible for coverage.

The Contestable Period

If a policyholder dies within the first two years of coverage, the insurance company might not pay the policy’s death benefits. This two-year window is known as the contestable period because it’s an opportunity for the insurance company to contest a payout. Another name for it is the exclusion period. Some policies explicitly state that a death within two years will trigger return of premiums and not a payout.

If a policyholder passes away during the exclusion period, the insurance company will usually want to review the policyholder’s medical records for the preceding two years. It’s not always easy for policyholders’ children to supply those records, though, so death benefits sometimes go unpaid. If an insurance company decides not to pay out death benefits, they’re required to return the premiums already paid.

In some cases, if a policyholder dies during the contestable period, the insurance company may return the value of the premiums paid, plus a portion of the death benefits. This portion will increase as the policy matures.

Find out now: How much life insurance do I need?

Is It Worth It?

Guaranteed life insurance comes with some risks. What do we mean by that? Well, there’s the risk that the premiums paid will top the value of the death benefits. Then there’s the risk that the policyholder will pass away during the contestable period and the insurance company won’t pay out. Finally, there’s the risk that a customer could pay more for guaranteed acceptance life insurance than he or she would for regular term life insurance.

Before committing to guaranteed life insurance, consider applying for regular term life insurance, complete with a medical exam. Even if your health isn’t perfect, you could still find an affordable policy that meets your needs. You have nothing to lose by shopping around, right?

Our advice: don’t assume that a costly guaranteed issue life insurance policy is your only route to coverage. Instead, consider guaranteed life insurance to be a fall-back plan. And remember that if no one is dependent on your income, you don’t have any shared debts and you have enough saved in your estate to cover final expenses, you might not need life insurance at all.

It’s a good idea to sit down with the person or people who would be your life insurance beneficiaries and go over your finances. Your heirs might tell you they could cover your final expenses among them without breaking a sweat, letting you off the hook for life insurance.

Another advantage to having a financial sit-down with your family is that it fosters transparency. Many people designate beneficiaries for life insurance but fail to notify the people they have chosen. It’s an oversight that helps explain the millions of dollars in unclaimed property in each state. Don’t let your policy end up in limbo.

Photo credit: flickr

Amelia Josephson Amelia Josephson is a staff writer covering financial literacy topics at SmartAsset. She holds degrees from Columbia and Oxford. Originally from Alaska, Amelia now calls Brooklyn home.

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