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Monday, April 23, 2007

The Basics of Guaranteed Issue Life Insurance

You've seen the ads on TV. Celebrities tell you about a life insurance policy with no medical exam. For some people, these "guaranteed issue" individual life insurance policies can be the only way to buy insurance protection.

Often marketed to the elderly, guaranteed issue individual life insurance will insure everyone who comes along, with no medical examination and without asking any medical questions. These policies should not be confused with simplified or quick issue individual life insurance — for which insurers will ask medical history questions but will not require an examination.

"There are some 'short form' life insrance policies that you shouldn't confuse with guaranteed issue," says Bill Schreiner, an actuary with the American Council of Life Insurers. "For a true guaranteed issue policy, there are no medical questions — you just send your money and get insurance."

What's the catch? There are a few, says Schreiner. Most guaranteed issue life insurance policies are designed to provide for only funeral expenses, so it can be tough to find a company willing to sell a policy with a face amount of more than $15,000 to $20,000.

Also, because guaranteed issue life insurance policies do not rely on medical information to set premiums, the cost tends to be very high. Insurance companies will use medical information to offer lower rates to people, who can prove they are in good health.

With guaranteed issue life insurance policies, because there is no medical exam or underwriting, insurance companies have no information other than the applicant's age and gender on which to base the premiums.

The high premiums, combined with a low face amount for the death benefit, can make guaranteed issue life insurance a less desirable option. For some of these policies, you could end up paying more in premiums after only a few years than your beneficiaries will ever receive from the insurance company.

The problem of consumers paying more in premiums than their beneficiaries will receive in death benefits has drawn the attention of state insurance regulators. The National Association of Insurance Commissioners (NAIC) has established a working group to consider what, if any, actions it should take.

Although critics have questioned the ethics of selling insurance products that may perform worse than a savings account, no insurance companies seem to be making excessive profits on these policies, according to Ernst Csiszar, the director of the South Carolina Department of Insurance and the chairman of the NAIC working group on small face value life insurance. "We are developing a disclosure statement that would warn consumers of the possibility that they might pay more in premiums than the face value of the policy," says Csiszar. "Anything more than that would potentially be a form of rate regulation, and the consensus of the NAIC is that we are simply not prepared to regulate the rates of life insurance."

Avoiding fraud

The final catch, according to Schreiner of the ACLI, is a concept called "graded benefits." Introduced to avoid insurance fraud, graded benefits clauses in guaranteed issue life insurance policies allow the insurer to refund a policy's premiums, plus interest, instead of paying the death benefit if the insured policyholder dies within two to three years of buying the insurance.

"Graded benefit periods prevent people in hospitals from signing up while on their deathbeds," says Schreiner. Insurers couldn't offer guaranteed issue policies without the protection these clauses provide, he says.

Some policies will pay out the full-face amount during the graded benefits period in the case of an accidental death, but not all guaranteed issue policies will offer this feature. As with any accidental death policy, the definition of "accidental causes" is usually quite limited.

In general, if you can buy life insurance after answering medical history questions or by undergoing a physical examination, you'll probably end up paying much less for a greater death benefit than you would with a guaranteed issue life insurance policy.

If you've been turned away from every other policy because of your age or your health, guaranteed issue individual life insurance can be a last resort.

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