If you’ve heard of “guaranteed issue” life insurance policies, you probably already know that they are unique in a number of ways. Not only are there no medical exams, but premiums are pretty high for the amount of the death benefit or payout amount.
In order to determine whether this kind of insurance is right for you, it’s necessary to do a little digging, use an interest calculator, and examine the key features of this type of insurance.
The following sections will explain what GI life insurance is, how it pays out, what average restrictions are, who buys the policies, and whether the cost makes sense for anyone.
What is Guaranteed Issue (GI) Life Insurance
Unlike all other types of insurance contracts, guaranteed-issue life policies require no medical exams, and applicants don’t even have to answer basic questions about the state of their health. In fact, you can be on your deathbed and sign up for a policy, and be approved as long as you pay the monthly premiums.
There are a few restrictions, as noted below. Still, if you survive for two years (in most cases, based on the company issuing the policy), then your beneficiary will receive the entire amount of the stated payout amount upon your death.
GI policies are big sellers, and most of the major insurance carriers offer them. Moreover, because their issuance is truly guaranteed, even to those in ill or dire health, premiums are much higher than for standard term and whole life policies, where applicants much undergo medical exams or answer a lengthy questionnaire about their health status.
How Policies Pay Out
Companies have different ways of doing things, but in general, all GI applicants must wait two whole years while paying premiums before the face value will be paid out upon death. If the policyholder dies before the two-year period elapses, then the insurance company returns the premiums paid up to that point with interest.
Premiums are returned to whomever the deceased indicates as the beneficiary on the policy, and the amount of interest paid with the returned premiums is usually between five and ten percent.
If the policyholder lives past the two-year wait period, then the full face value of the death benefit goes into effect. However, someone who decides that they don’t want coverage anymore, or don’t need it, can end the policy by simply stopping payment.
At that point, they won’t get any of their paid-in premiums back, but the policy will become null and void, and the holder won’t have to make any additional payments.
Who Purchases GI Coverage?
By far, people who buy GI policies tend to be older and in relatively poor health. Some are under the impression that they can buy traditional whole or term life but get turned down for health reasons.
Then, they often seek out high-premium, low benefit GI contracts that offer at least a modicum of financial security for their loved ones. Most of the major carriers do not provide death benefits on GI policies above $25,000. There are a couple exceptions that go as high as $35,000, but that’s it. You won’t find $100,000 benefit amounts for any GI policies on the market today.
Example of Value – Comparing with Compound Interest
Premiums are based on age, gender, and the amount of the death benefit. You can use a compound interest calculator to get a feel for whether a GI policy might make sense for you.
To take one representative example from a real company’s rate schedule: assume a 52-year-old female in poor health applies for a policy. She is otherwise not able to purchase life insurance. Still, She wants to provide a modest amount of funds for her family at death, like $25,000, to cover funeral expenses and perhaps to go toward medical bills.
That person could purchase a $25,000 GI policy for about $75 per month. Compared to a typical term policy for a healthy person, that premium is very high. However, we’re talking about a very ill applicant. Is this a good value? Suppose the person lives for ten years.
Could she have invested in a stock fund that, hypothetically, pays five percent interest per year and done better? Let’s use the compound interest calculator to find out.
Enter $75 for the principal, five percent as the compound rate, monthly as the compound frequency, length of term at ten years, payment as $75, and payment frequency is monthly. Thus, after investing the $75 monthly at five percent interest in the stock fund for ten years, the person would have accumulated $11,769.70, which is far less than $25,000.
At least for a 10-year survival assumption, the policyholder got a decent value for the premiums paid.