309- What is Guaranteed Issue Underwriting of Life Insurance?
By: Al Lurty, Fellow of the FLMI, Retirement Income Certified Professional, and Wealth Management Certified Professional
As a consumer, you’ve probably seen promotions and ads for “guaranteed issue life insurance.” In my last post, I discussed what simplified issue life insurance is. In this post, I will discuss how the guaranteed issue (GI) variation works.
As I noted before, historically life insurance has been purchased either as an individual, typically with a full application, or as part of a group (through an employer, or an association the person is affiliated with). The GI approach is most commonly associated with group life insurance provided by an employer, where an amount of insurance (typically one times salary, but it can be higher) is offered to the employee regardless of health, typically upon commencement of employment.
It is paid by the employer, although the cost of insurance amounts in excess of $50,000 is included in the employee’s taxable income. It can also be provided by an association or affinity group. In some cases the carrier will want to verify that the applicant is actively at work, which in their view precludes serious illness or disability.
So what protects the carrier in the employer or association group? Briefly, for groups, it’s the idea that if enough members of the group get insurance, the impact of the unhealthy lives will be mitigated by the premiums from the far more numerous healthy lives. Otherwise, if only the unhealthy lives apply, the carrier would quickly find itself in financial trouble.
Another kind of GI life insurance, which you’ve probably seen on TV with a celebrity’s endorsement, involves relatively small amounts of life insurance (usually under $50,000) offered to seniors with no underwriting questions and often marketed with the phrase “you cannot be turned down for coverage” or something similar. So what’s the catch? Or, put another way, what protects the carrier on smaller amounts of individual insurance?
This type of insurance, often known colloquially as final expense insurance or burial insurance, is neither inherently bad nor good (we’ll explain why in a moment), but it’s important to understand the policy. First, the offer is for small amounts of life insurance. No carrier will offer $5 or $10 million of life insurance on this basis as I alluded to above, for the same reason that a fire insurance company doesn’t write coverage on a burning building, the life insurance company must underwrite the applicant for larger amounts of individual insurance, or else every person with a terminal illness would apply for and receive large amounts of coverage and the carrier would quickly go out of business.
Second, these policies typically have significant limits on the benefits payable in the first two years of a policy, usually only refunding the premiums paid and perhaps some interest. This is to limit the carrier’s exposure to the scenario above. Even on small death benefits, if enough people with very short life expectancies obtain insurance for pennies on the dollar, the carrier will find itself in financial straits.
After two years, the full death benefit is paid; in the carrier’s view, the impact of imminent death has been lessened, and if death is from an accident, these will often pay the full amount even during the first two years. The coverage is permanent insurance (such as whole life), not term, and will build some cash value.
It’s important to understand just how much coverage the applicant is getting. Many times these programs are marketed as “Life insurance for only $XX per month,” but what matters is how much coverage the applicant gets, which will be based on age and gender (these are typically available for ages 50-80). Obviously, if the ad says it costs $20/month but you’re only getting $1,000 of coverage, in a little more than 4 years you’ll have paid more in premium than the death benefit.
Can these policies be a good deal? It depends. For someone that can’t get coverage anywhere else, even a small amount of coverage can be helpful in alleviating the financial impact of death (medical expenses, nursing home and funeral bills, etc.) However, the carrier's pricing must reflect that the block of business will experience higher than normal mortality, so these aren’t a good deal for someone who is reasonably healthy. Talk to your financial professional about these types of policies (and the association/affinity coverage I noted earlier).
I hope this helps explain guaranteed issue life insurance. Please reach out on the FinancialVerse website with any questions.
To discover the answers to key questions of buying life insurance and to get more information on the benefits of coverage, check out The FinancialVerse: Today’s Life Insurance — A Protection Tool for Your Future. This book will help you prepare to meet with a financial professional and apply for the life insurance coverage that you need.