Guaranteed Issue Life Insurance and Its Alternatives
Learn which type of policy is right for you
There are various points in life when people decide they need life insurance. Once you've come to that decision, you will usually be presented with several options and plans. These may be guaranteed life, term life, or whole lif insurance. All play their part, but knowing which type of life insurance policy is best for you can really help save you money and protect your family and their lifestyle after you're gone.
Do I Need Life Insurance?
If you are wondering if you need life insurance, you probably do. Life insurance isn't just for when you get married, are buying your first house, or have children. There are many reasons a person may need life insurance, plus some good strategies behind when to get life insurance and what kind of insurance to get. Some situations may call for short term life insurance policies, while whole life policies may make more sense in others.
What Kind of Policy Should I Get?
Before you decide what kind of policy to get, you need to understand what you want from your life insurance policy. Is it to protect your family or other dependents? Do you want a life insurance policy that will also allow you to save money, and borrow money from it if you need it in the future? How long you need the policy for and what your medical condition or age are will also determine what kind of policy you should get.
For example, someone buying life insurance at age 20 will have very different premiums than someone buying a policy at 35, or when they are over 50.
The rate you pay for life insurance will vary based on risk. This is why many life insurance policies require you to take a medical exam.
Medical Issues and Getting Life Insurance
If you have no medical issues or nothing serious in your medical history, you will have more options than someone who has medical issues. The good news is that there are life insurance policies for many circumstances.
Working with a good financial planner or life insurance agent or broker will help you analyze your situation and narrow down those choices. You will not have to pay them extra to go over your options—they get paid a commission by the insurance company—since it is their job to review coverage with you. In the same way it pays to shop around for health insurance, working with a professional in life insurance can save you money and provide you with solid advice.
Guaranteed Issue Life Insurance Policies
Although the word guaranteed tends to make us feel secure, a guaranteed life insurance policy is unlikely to offer you the best rate or benefit because it is a policy that is created to provide coverage to people who may not pass the normal medical exams in regular term or whole life policies. Passing a life insurance medical exam may seem scary, but it's a fairly straight forward process. You should always try for a policy that screens with a medical exam before one that doesn't because the rate will be lower, and if something happens in the first two years that was unpredictable, your life insurance beneficiary will be more likely to be able to collect the death benefit.
Benefits and Drawbacks of Guaranteed Issue Life Insurance
There are two key benefits of guaranteed life insurance:
- No medical exam
- Quick and easy
Keep in mind that a quick and easy solution is not always the solution that will give you the most value. You may be getting something fast and easy now that will leave your beneficiaries or family in a less advantageous situation when you pass away.
When purchasing life insurance, it is always best to look at the big picture and think long term.
While there are benefits, there are also a few drawbacks when it comes to guaranteed life insurance.
- For many guaranteed issue policies, if you die within two years of getting the policy, the only payout may be a refund of your premium payments.
- There may also be higher premiums due to the higher risk factors of less underwriting and no medical exam. The insurance company is taking on more risk, so it may charge a higher rate.
Alternatives to Guaranteed Issue Life Insurance
Simplified issue life insurance is an alternative to the guaranteed issue life insurance option. Both are term life insurance policies with limited answers to questions or criteria to fill, but the simplified issue life insurance will ask a few more questions than guaranteed issue life insurance will, but may give you a less expensive premium as a result.
Guaranteed issue should be a last resort option, so be sure and examine all your options with your representative before jumping at a guaranteed issue life insurance plan.
Term and Whole Life Insurance
The most common and affordable type of life insurance policy is term life insurance. This policy can be purchased for a term of anywhere from five to 30 years and is straightforward.
Basically, you pay an agreed-upon premium, and if you die during the term of your policy, the insurance company will pay out the death benefit—subject to the policy terms, of course.
For example, life insurance policies contain a clause that allows the insurance company to contest or investigate a death if it occurs in the first two years, like in the case of a suicide, for example. However if all conditions are met and everything checks out after the investigation, unlike the guaranteed issue life insurance policy, a term life insurance policy would pay the full benefit, and not just the premiums paid for the first two years.
When choosing a term life policy, be sure and find out if it is renewable and whether you will need to take a medical exam to renew the policy. Obviously, it is more advantageous to take a policy where you do not have to worry about qualifying again. The risk with term life insurance is that if you want to buy life insurance again after the selected term, you may have issues if you need to take a new medical exam. Always consider this in your decision.
Whole life insurance policies offer additional benefits besides just a death benefit. Whole life policies offer living benefits, including tax-free dividends that may accrue (referred to as the policy's cash value). You may even be able to borrow money against the value of a whole life policy if there comes a time that you decide you need to do so.
Whole life policies can be selected as part of your overall financial plan, but because you are not only paying for the life insurance premium in a whole life policy but are also paying for a "savings" element, the cost will be more. This is a more expensive policy because you are building a life insurance policy with values in it.
Universal Life Insurance
Universal life insurance is another option that you may have heard of, as well as variable, and universal-variable policies. They are like whole life because of the term and the investment aspect. Universal life insurance will also be more expensive than term life because of the investment portion of your payments for this kind of policy.
Convertible and Combination Life Insurance Policies
Another tip when purchasing life insurance is to ask if the policy can be converted without a new medical exam. It is always a good idea to understand what your options are if your needs change in the future. The type of policy you take today may not be what you want in the future, you don't want to risk losing value, or having to take medical exams if you decide you want a new kind of policy. Always ask questions before changing a life insurance policy because you may stand to lose a lot.
When you are reviewing your options with a life insurance professional such as a financial planner, agent, or broker, they may suggest combinations of different types of policies to save money. Make sure to ask lots of questions an have them help you figure out what makes the most sense.
For example, if you only need to carry a high level of life insurance for 10 years, yet you want to carry life insurance for your whole life, they may suggest taking a 10-year term for the portion of money you think you need for that limited time and a smaller value in a whole life policy.
For example, if your home will be paid off in 10 years, and your kids will be finishing college, you might decide that for the next 10 years you need $250,000 of life insurance, but after that, you may decide you only need $150,000 because you will have less debt and financial responsibility. So rather than offer you a policy of $250,000 on a whole life policy, they may offer you combinations of cheaper term life insurance for your selected term. In the case above, it may be a $150,000 term policy and a $100,000 whole life policy.
There is no limit to the combinations a financial planner or agent may offer you. The most important thing is to understand what you want to accomplish and ask for all your possible options.
Now that you understand guaranteed life insurance and its alternatives, you can talk to your financial planner or life insurance agent when shopping for life insurance and they should be able to explain everything so that you can make a well-informed decision. Remember, the best type of policy for you is one that will protect your family and meet your financial needs in life and after you're gone.