Guaranteed Life Insurance

Some insurance companies offer life insurance policies without requiring the applicant to verify his or her insurability by taking a medical exam or even answer questions about medical status. These policies are called guaranteed issue or guaranteed acceptance life insurance. The various types of guaranteed life insurance are intended to cater to particular customer classes by offering life insurance on narrowly-circumscribed terms.

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Rationale for Guaranteed Life Insurance

Ordinarily, applicants for life insurance are required to demonstrate that they possess no unacknowledged health features or habits that would increase their mortality risk. These requirements are set up to allow a valid calculation of the applicant’s statistical life expectancy – a calculation that might be drastically changed if new information came to light.

The shorter an individual’s life expectancy, the more reserves the insurance company will have to carry to cover the contingency of his or her death. The more reserves are required, the larger will be the premium charged for a policy. Premiums for individuals whose life expectancy is dramatically foreshortened may be prohibitively high.

Two classes of applicants fit the foregoing profiles of limited life expectancy. One class is older customers, at or near retirement age or older, whose advanced age leaves them with comparatively little time left to live. The second class consists of people with a known medical condition that likewise limits their life expectancy.

These are the primary groups to which guaranteed life insurance caters. Guaranteed life insurance is designed to make life insurance available to those who would otherwise be denied coverage or be unable to afford it.

Features of Guaranteed Life Insurance

Since the purpose of guaranteed life insurance is to insure those whose age or medical status would otherwise bar them, it would be costly and pointless to conduct an underwriting inquiry into their medical condition. Instead, issuers of guaranteed issue or acceptance policies forego medical examinations and ask no health-related questions of applicants. Rejection for ordinary life insurance does not affect qualification, either. Willingness and ability to pay the stipulated premiums suffice to acquire guaranteed life insurance.

Companies issuing guaranteed life insurance protect their financial viability in several ways. First, they generally sell whole-life insurance, a form of permanent insurance whose premiums for a given level of coverage are typically several times higher than those of term insurance. Second, they severely limit the range of death benefits offered. These limits vary by company, but ranges of $3-50,000 and $5-25,000 are common. Third, they limit the age range of qualifying applicants to 40-80 or 50-85 years of age. Fourth, they offer “graded benefits,” in which the death benefit of the policy falls well short of its face value for the first two years of the policy. In the policy’s first year, for example, the death benefit might be limited to premiums paid, augmented by reasonable interest on that sum. In year two, the death benefit might be 50% of the policy’s face value. In year three and subsequently, the death benefit rises to equal the full face value of the policy.

Gradation of benefits is an anti-fraud measure intended to forestall elderly people close to death from buying the policy to quickly enhance the value of their estate. (Sometimes the elderly will be approached by strangers who propose to insure their lives and split the death benefit of the guaranteed life insurance with their estate. This practice is called “stranger-originated life insurance,” or STOLI.) In accordance with state law, applicants have a grace period (a “free look” period lasting either 15 or 30 days) in which to accept the policy or cancel it without penalty. Lastly, the pooling of a large number of risks – only some of which will necessitate payout in any one year – creates a degree of inherent protection for the insurance company.

Value of Guaranteed Life Insurance

The amount of life insurance coverage in a guaranteed life insurance policy is enough to pay funeral expenses, or even final expenses in total, with only a moderate residual. Even though the objective of guaranteed life insurance is to insure the otherwise uninsurable, the policy might not always be sensible for its target customers. For example, rates for guaranteed life insurance might be so high that total premiums paid may exceed the death benefit reaped by the beneficiary. Some states’ regulations require the policyholder to be notified when this point is reached.

Marketing Aspects of Guaranteed Life Insurance

Guaranteed life insurance is very often marketed to elderly people as an easy way to obtain insurance for final expenses. It is important that anybody buying it for these purposes bear in mind the gradation of benefits, which would probably render the death benefit incapable of handling final expenses for the first year of the policy and might do so in the second year as well.

Guaranteed life insurance should not be confused with “quick-issue” life insurance, which issues a policy no later than 7-10 days after application if the applicant supplies favorable answers to selected health questions. The medical information and streamlined underwriting on quick-issue policies, which not infrequently offer term insurance, afford somewhat more favorable terms to the policyholder than do guaranteed life insurance policies.

Summary

Guaranteed life insurance provides a means of obtaining permanent insurance for people who would otherwise lack it – the elderly and those with risky medical conditions and personal habits. In order to survive financially, issuing life insurance companies offer the policies on limited terms: permanent insurance, very high premiums, severe coverage limits and graded benefits. As always, the potential buyer should be fully aware of the terms and limitations of this insurance and confident of its necessity.

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