What is guaranteed issue life insurance?

Guaranteed issue life insurance is a small whole life policy you can get without a medical exam or health questions, as long as you fall within the insurer's age range. In exchange, the full benefit usually doesn't start right away. New York's Department of Financial Services says that in the first two or three years, these plans typically pay back premiums, sometimes with interest, or a reduced amount.

How guaranteed issue works

With most life insurance, the insurer looks at your health before it agrees to cover you and sets a price. That review is called underwriting. A guaranteed issue policy, sometimes sold as guaranteed acceptance, skips it. If you are within the eligible ages and pay the premium, the policy is issued.

These policies are usually small whole life policies meant for funeral and end-of-life costs. That puts them in the same family as final expense insurance, and some final expense policies are sold on a guaranteed issue basis.

Because the coverage is whole life, it lasts for your lifetime as long as premiums are paid, as the Texas Department of Insurance describes whole life coverage.

The graded benefit in the first years

The insurer doesn't know your health, so it limits what it pays in the early years. DFS calls these graded death benefit plans. It describes them as limited coverage with no medical exam, where the benefit in the early policy years, generally the first two or three, is typically a return of the premiums paid (sometimes plus interest) or a reduced amount.

Here is how that looks with round, hypothetical numbers. Say a policy has a $10,000 benefit and a two-year graded period. If the insured person dies of an illness in the first year, the beneficiary might receive the premiums paid so far plus a stated interest rate. After the second policy anniversary, the full $10,000 would be paid. Ask whether a death from an accident is paid in full during the graded period, and check the answer in the policy's own wording.

The graded period is the single most important thing to understand before buying. If you expect to need the money within two or three years, a policy that asks health questions may pay more sooner, if you can qualify for one.

Why it costs more for each dollar of coverage

Without underwriting, the insurer prices the policy for a group that includes people in poor health. Healthy buyers end up paying for that wider risk.

New York regulators make insurers say this out loud. Under DFS rules, applications for graded death benefit policies issued between ages 50 and 75 must carry a prominent notice saying that, since the policy has minimal or no medical underwriting, the premium includes an extra mortality risk charge. The notice adds that someone healthy enough to qualify as a standard risk would likely have paid less for a fully underwritten policy.

So the buyer gives up a lower price and full coverage from day one in exchange for skipping the health questions.

Simplified issue compared with guaranteed issue

There is a middle option between full underwriting and none.

A simplified issue policy asks a short set of yes-or-no health questions, typically about serious recent conditions, without an exam. If your answers qualify you, the policy may pay the full benefit sooner than a guaranteed issue policy would. If you have a condition that would lead to a "no," guaranteed issue may be the coverage you can get.

Answer any health question completely and accurately. TDI explains that life insurance policies have a two-year contestable period, during which the insurer may review the application for wrong or missing information if you die.

Who tends to look at guaranteed issue

People usually consider guaranteed issue coverage when they have been turned down for other life insurance, or when they have health conditions they expect would lead to a refusal. Some simply want a small policy without health questions. In each case, compare the graded period and the benefit amount against what you are trying to cover. The National Funeral Directors Association's latest study put the national median cost of a funeral with viewing and burial at $8,300, and with cremation at $6,280. Our guide to funeral costs shows what those figures include.

Questions to ask about any guaranteed issue policy

• How long is the graded period, and exactly what is paid if death occurs during it?
• Is a death from an accident paid in full from the start?
• What are the youngest and oldest ages at which the policy is issued?
• What is the largest benefit available?
• Can the premium ever change, and how long is it due?
• How long is the free-look period? TDI says Texas policies have one of at least 10 to 20 days.
• Who is named as beneficiary, and is there a backup?
• Would I qualify for a simplified issue policy instead?

To see how age and benefit size change the price, read final expense insurance cost by age. The free Final Expense Cost Guide has these questions on a page you can keep beside the phone. Get the free guide, or call us at (888) 410-2975.

Frequently asked questions

Does guaranteed issue life insurance really have no health questions?

A guaranteed issue policy is issued without a medical exam or health questions as long as you are within the insurer's age range. The insurer manages its risk with a graded benefit instead. New York DFS explains that in the first two or three years, these plans typically pay back premiums, sometimes with interest, or a reduced amount.

What is a graded death benefit?

A graded death benefit pays less than the full face amount if the insured person dies in the early policy years, generally the first two or three, according to New York DFS. During that time the payout is typically a return of premiums, sometimes with interest, or a reduced amount. After the graded period ends, the policy pays the full benefit.

Why is guaranteed issue life insurance more expensive?

The insurer doesn't review your health, so it charges for the added risk. New York DFS requires graded benefit applications for ages 50 to 75 to state that the premium includes an extra mortality risk charge, and that a healthy applicant would likely pay less for a fully underwritten policy.

What is the difference between simplified issue and guaranteed issue?

Simplified issue asks a short list of health questions with no exam, and the insurer can decline you based on the answers. Guaranteed issue asks no health questions within its age range. Because it takes on more risk, a guaranteed issue policy usually limits the benefit for the first two or three years.

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