One of the biggest fears of people who need life insurance is that the insurance company will reject their application and fail to grant the policy. Frequently, people cannot take out conventional insurance due to their health status, lifestyle, or quite simply their age. In these cases, guaranteed acceptance life insurance is a good alternative. These are policies where the insurance companies ask practically no questions, but impose much higher prices.
In this article, you can learn about guaranteed life insurance, how it works, and under what circumstances it might be interesting to you.
Guaranteed Acceptance Life Insurance: Table of Contents
What is Guaranteed Acceptance Life Insurance and How Does it Work?
If you are looking for life insurance, you may be worried that you will not pass the qualification stage. During this process, which is often long and difficult, the insurance company decides if you meet the requirements necessary to enjoy their insurance, and sometimes the applicant is denied coverage. If you believe you might be in this situation, you can turn to an interesting alternative: guaranteed acceptance life insurance. It is a little-known insurance category, but very useful to those who have had difficulty getting qualified.
A guaranteed acceptance insurance policy is normal life insurance, but without the qualification process. More specifically, this means that the insurance company cannot reject you and will have to grant you a policy. In exchange, the insurer will require much higher premiums than those of normal policies. In addition, the payout, or death benefit, will be much lower than usual.
Typically, insurance companies also offer gradual benefits (or the two-year rule). This means that, for example, if the insured dies before the end of the first or second effective year of the policy, no payout will be made (although in this event, insurance companies tend to return the paid premiums).
These precautions (high premiums, low coverage, and gradual benefits) allow insurers to assume the high risks presented by people who are generally of an advanced age or have serious pre-existing health conditions.
In other aspects, guaranteed acceptance life insurance functions like traditional or whole ordinary permanent life insurance. This means that, once underwritten, it remains with the insured until their death, at which time the payout is made to the beneficiaries they designated.
Apart from the death benefit, these permanent life insurance policies also have a savings element. Their capacity for savings generates what is called cash value, a sum that is used to generate part of the payout, which is made to the insured once it has reached a certain total. This added value accumulates because the premiums paid for the insurance are level—you always pay the same amount. During the first years of the policy, they are disproportionate to the risk assumed by the insurer. But in later years, after having been level, they are lower than they need to be in relation to the assumed risk. The imbalance from the first years accumulates money that the insurer invests, and this generates the cash value.
In the case of whole or traditional life insurance, savings instruments are very conservative, so they generate added value slowly. In exchange, they are reliable instruments with assured profitability and pay a death benefit without fail. The only exception is in the case of guaranteed acceptance policies which, as we have seen, do not make a payout if the insured dies before the first two effective years of the policy have ended.
Reasons Why You Might Be Denied Life Insurance
As you can see, the guaranteed acceptance option is a very interesting way to avoid a difficult qualification process. If you are looking for insurance, you likely got a sense of these difficulties as soon as you requested a quote and the insurer asked you about your age or medical status for informational purposes.
Things get more complicated during qualification, which can take months in the case of permanent insurance. During this long process, the insurer will ask you questions and require information. Generally, they will ask you for medical exams, and if you do not pass their requirements, they will not grant you insurance. But, even if they do grant you the insurance, they can void the policy if they later discover that the information you provided was false. That is why it is very important for your relationship with the insurer to be based on honesty: the main mistakes people make when underwriting life insurance are caused by a lack of transparency when qualifying.
When the insurer asks you for medical exams and information, they look for indicators that determine the risk that will be assumed by insuring you. If this risk is excessive, the insurer will deny you access to conventional policies.
The most frequent reasons for exclusion are the following:
- Advanced age. Older people have a very short life expectancy, which is why insurers tend to reject them. This is why taking out life insurance while you are still young is the best solution. You can even underwrite child or juvenile insurance.
- Tobacco or drug use. Insurers are hesitant to insure people with a long history of tobacco use. They also tend to deny life insurance policies to people who have or have had a drug problem.
- Pre-existing medical conditions. If you have a health condition that puts your life at risk, it is possible that you may not be able to access insurance. More specifically, diseases such as cancer, diabetes, multiple sclerosis, or heart conditions are a frequent cause for exclusion. Suffering from terminal illness is also a reason why you may not be able to obtain coverage.
- Mental illness. Mental illness patients also tend to be rejected during qualification.
- Dangerous habits. If you have a risky lifestyle, practice dangerous sports, or have a job that implies serious risks, you may also have problems obtaining conventional insurance.
- Financial situation. Occasionally, insurers will deny insurance access because they question the financial solvency of the applicant.
Despite these reasons, you should know that qualifying for insurance is easier than what most people think. In fact, experts know that many of the people in the United States who do not have insurance (approximately 40% of consumers, according to LIMRA) do not have it because they mistakenly think that it will not be given to them.
The best thing you can do is contact an insurance agent and get the appropriate information. Or, you can use quoting tools to do some exploration of your own. If after taking these steps, you still find the doors to insurance closed to you, remember that you can turn to guaranteed acceptance life insurance.
Advantages and Disadvantages of Guaranteed Acceptance Life Insurance
If you choose this form of insurance, you should be very clear about the pros and cons. It is a solution for obtaining insurance, of course, but you should be aware of several notable drawbacks. The main advantages of guaranteed acceptance life insurance are as follows:
- No medical exams. As you to not have to pass a qualification process, you do not have to take health exams and there is no reason to be afraid that you will be denied the policy.
- No age limit. There is virtually no access limitation due to age. Some companies will let themselves insure people up to 80 years old. This feature makes guaranteed acceptance insurance highly recommended for older people or seniors.
- Unconditional renewal and free cancellation. Guaranteed acceptance policies are very flexible because they unconditionally renew themselves throughout the entire lifetime of the insured. In addition, if you want to cancel, there are no additional charges.
On the side of disadvantages, you should consider the following points:
- High price. As the insurer assumes a high amount of risk and does not set conditions, the premiums are very high. You will pay a higher monthly amount than you would for temporary or term insurance, much more than for permanent insurance. For this reason, before taking out a guaranteed acceptance insurance policy, make sure that conventional forms of insurance are truly unavailable to you.
- Low coverage. This kind of insurance pays for very little coverage. In contrast to conventional policies, which may eventually make payoffs of a million dollars or more, these rarely exceed $50,000. You should consider these low amounts very carefully, because sometimes they are barely enough for the funeral costs of the insured who dies [Also remember that you can opt for final expense insurance to pay for your funeral]. If you need greater coverage, try to look for conventional insurance that offers higher payouts.
- Two-year rule. Many policies include a rider that stipulates that no pay out shall be made if the insured dies before the insurance has been effective for two years. In some cases, a limited benefit payment is established for this initial period. For example, half the payout may be made instead of nothing.
As you can see, guaranteed acceptance insurance policies are interesting, but have serious limitations. Before purchasing one, you should be very certain that this is your only opportunity. If this is the case, do not question it—it is better to have limited life insurance than none at all.