The Problem with Guaranteed Issue Life Insurance

Guaranteed issue life insurance is also known as guaranteed acceptance life insurance. This type of plan doesn’t provide full coverage until a two year waiting period expires. Many guaranteed issue plans are sold directly to consumers without an agent. Insurance companies that sell direct to consumers are financially incentivized to sell as many of these policies as possible. Insurance agents, on the other hand, have a disincentive to sell these policies. Agents take a drastic pay cut on guaranteed issue plans. This means that agents fight to get their clients a better policy because the commission is better. Agents should do the right thing because of ethics, but its nice to know that a financial incentive also causes them to do good.

People assume that serious health events such as cancer and heart attacks will disqualify them from everything other than guaranteed issue. An agent may be able to challenge that assumption, but if people buy direct from the insurance company without talking to an agent, that assumption will go unchallenged. In reality, that assumption is often false. Many serious health events become irrelevant for simplified issue whole life once two years has passed.

Life Insurance for Dangerous Jobs

Do you have a dangerous job and need life insurance? Most types of life insurance ask at least one underwriting question about your occupation. You can either do things the hard way, finding a company willing to accept your particular occupation, or you can simply go with a type of policy that doesn’t ask occupation questions. Is it fair if the insurance company doesn’t ask about a risky job and you have one? Yes, the insurance companies are very much aware of the risk factors out there. If they don’t ask a question, it’s because they don’t care about that risk or they already beefed up their premium to account for a certain percentage of people with dangerous jobs. As far as I know, all term life policies want to know what job you have (guaranteed issue term life is probably the one exception). Whole life policies also ask about occupation, except for simplified issue whole life and guaranteed issue whole life. Guaranteed issue products are not the best option because that product is designed for the most extreme risk, such as someone who was just diagnosed with cancer or terminal illness. You’ll end up with coverage limitations (2 year waiting period) and higher premiums if you go with guaranteed issue. Therefore, the best thing to use for dangerous jobs is a simplified issue whole life policy. With simplified-issue, there are no occupation questions, but there are questions to eliminate high risk medical problems. This allows you to have a policy with lower premiums and no coverage limitations.

Life Insurance Misconceptions

A licensed insurance agent corrects misinformation about life insurance.

The more I scour the internet, the more misinformation I find about life insurance. Its everywhere. To make matters worse, much of this information is coming from supposedly reputable websites that search engines give prominent placement in their search results. There is a dearth of fact checkers out there when it comes to life insurance, so I decided to take up the challenge and become one of them. I’ve combated misinformation in the past, but I would use a single blog post to confront a single piece of misinformation. For this blog post I will do something different. For this post I will add content each time I find more misinformation. I imagine this post will become quite large. The best advice I have for people is to use an experienced agent for information. Don’t rely on the internet if you can help it. If you must use the internet, at least make sure the author is an experienced agent (like myself).

Children Owning Life Insurance On Their Parents

I read an article today that said it may not be preferable for adult children to own life insurance on their elderly parents. The article didn’t give any reasoning for this preference. I’ll give some good reasons for children owning life insurance on their parents. The first reason has to do with Medicaid spend-down. In order for Medicaid to pick up the tab, people must not have countable assets above $2,000. Most seniors, if they have life insurance, will have a permanent policy that has cash value, and cash value is considered a countable asset (the government makes an exception if the face amount is $1,500 or less). Just so I don’t scare a bunch of people, the cash value accumulation is very slow for policies with a low face amount. However, if you would like to remove all risk of being disqualified from Medicaid because of cash value, have your children own the life insurance policy. The government could care less how much cash value is in a policy if you don’t own the policy.

Another good reason for children owning the policy has to do with cognitive decline. Cognitive decline is a natural part of aging. Seniors may eventually lack the capacity to handle their own finances. If someone owns a policy, they automatically receive all financial notices related to the policy. If an adult child owns the policy, the child receives all notices. The person who receives policy notices should be the person best equipped to handle financial problems. Some policies may be structured in a way that someone other than the owner receives notices, but this is not the default option.

Perhaps the only deterrent for children owning a policy is the application process. Many insurers require both the owner and the proposed insured to sign the application. This may be impractical if the child lives far from the parent.

Permission To Insure

One article I read today said that someone wanting to buy life insurance on you must get your permission. First, minors are exempt from the permission rule. Second, the rule can be bypassed for adults if there is a power of attorney. I will say that very few insurance companies accept signatures from a power of attorney, so you will have to do your homework to find one. You’ll also want your agent to do his or her homework because there is extra paperwork involved. The insurance company may also want a compelling reason for using a power of attorney.

Exam Requirements

A recent article said that most term insurance policies require a blood and urine sample. Here is a more correct statement: there is an escalation of underwriting requirements depending on the rating class and the amount of coverage. Sometimes the coverage amount is low enough that no medical exam is required. Even when exams are required, it can be something as minimal as an agent taking a saliva sample. You won’t know what’s required until you speak to your agent. If you are going through a full paramedical exam for life insurance, the best thing is avoiding strenuous exercise before the exam. Strenuous exercise can throw off your vitals and make you appear very ill. People have been denied coverage over this mistake.

Buying Life Insurance Without An Agent

I’ve been seeing more and more advertisements lately that say you can sign up for coverage without talking to an agent. There is no harm in talking to an agent. In fact, many consumers make the mistake of not talking to an agent and simply going with the cheapest policy they can find. The cheapest policy is likely to be term insurance with no living benefits. Living benefits are important if you develop a terminal, chronic, or critical illness during your term policy. A cheap policy may also lack conversion privileges. However, if you are only looking for a death benefit (no living benefits) and you don’t care about conversion to a permanent policy, then you can safely buy term insurance without an agent. Be careful not to sign up for accidental death insurance. Consumers sometimes sign up for accidental death thinking that its term insurance.

Increasing Coverage

When asked how to increase life insurance coverage, one article said, “simply increase the coverage limit on your existing policy.” First of all, in my 8 years as a life insurance agent, I’ve never seen a whole life policy that allows an increase in death benefit. Adding coverage usually means a separate policy and more underwriting.

The Price For Coverage

I read an article today that made the oversimplified statement that more coverage means higher premiums. Insurance premiums are based on units of coverage, and each unit of coverage equals $1000 in benefits. Insurance companies use something called banding to determine the price per unit. For example, one band might be 3 – 50 units ($3,000 – $50,000 in benefits). The lowest bands have the highest price per unit. The highest bands have the lowest price per unit. In other words, someone with a $250,000 policy will pay less per unit than someone with a $50,000 policy. Think of it as a volume discount.

Should I Replace My Life Insurance Policy If I Find A Better One?

This post discusses the good and bad reasons for replacing a life insurance policy.

I read life insurance articles all the time. One article that I read said replacements are typically a bad idea. As an agent, I know there are legitimate and illegitimate reasons for replacing a life insurance policy, but I would never make a blanket statement that replacements are generally good or bad. That would be irresponsible. Let’s start off discussing legitimate reasons for replacing a policy.

When it comes to simplified issue whole life, underwriters don’t care about certain medical events such as heart attacks if the event occurred long enough in the past. In fact, someone can have a dozen heart attacks and it wouldn’t matter as long as he or she passes the time threshold (agents call this the lookback period). I’ll explain why the lookback period matters when considering a replacement. Let’s assume someone was scared into buying a life insurance policy because he or she had a heart attack less than a year ago. That person would be limited to modified whole life. Modified whole life (sometimes referred to as graded whole life) has a two or three year waiting period for full coverage. During this waiting period, the full death benefit is only paid out for an accidental death. Let’s assume a year passes and the same person can now qualify for ordinary whole life (no waiting period). Replacing a modified whole life policy with ordinary whole life is appropriate in this situation.

That last example was an obvious one. A less obvious choice occurs when the same type of policy with the same amount of coverage is considered for replacement because of price. Many agents will point out that a replacement starts a new contestability period. A contestability period is a two year period from the start of a policy in which the insurance company can investigate a death claim. The consumer risk associated with a contestability period is sometimes overstated. As long as the insured was honest on the application, there is nothing to worry about except for a slight delay in benefit payments as the insurance company investigates the claim.

If there is only a slight price difference between the old policy and new policy, a replacement might not be worth it. The small price difference won’t justify losing the time spent satisfying the contestability period. Also, a replacement means you’ll be cancelling the old policy, and there is a time investment with that process (granted its not a huge investment of time). Be wary of agents pushing for a replacement when both policies are of the same type and similar price. Agents typically receive more commission by doing replacements instead of extra policies.

Are you protected from bad replacements? Yes, the insurance industry has put some safeguards in place. One safeguard is a free-look period in which a replacement can be rescinded and a full refund issued on the new policy that was purchased. The agent is also required to give you literature that helps you be more informed about replacements. Below is a sample replacement form that is used for all replacements in the state of Texas.

First page of standardized replacement form used in Texas
standardized replacement form used in Texas – page 1
Second page of standardized replacement form used in Texas
standardized replacement form used in Texas – page 2

Finding the Best Life Insurance Agent

Learn what criteria is not important when searching for the right insurance agent.

As an insurance agent, I feel a sense of duty to combat misinformation in my field of study. I would say at least 90% of life insurance articles on the internet are oversimplified at best, and misinformation at worst. So I was pleasantly surprised when I found a good article. Most points I agree with, but there are some minor points that I don’t agree with.

The author spends some time letting people know how to check the credentials of an insurance agent. Checking credentials isn’t what I call normal behavior. For instance, I don’t ask real estate agents to show me their license. Likewise, I don’t ask doctors for their medical license. However, the paranoid individual is always welcome to check. I believe every state’s department of insurance has their own website providing agent license information and the companies an agent represents (here is the Texas website for agent credentials). Another reason for not worrying about an agent’s credentials is that every agent goes through background checks for every company they represent. If an agent has anything more than a minor traffic violation, that agent could miss the opportunity to write business for an insurance company. Insurance companies also don’t like agents with bad credit, but that has more to do with an agent’s ability to repay unearned commission.

The author mentions time pressure as a red flag. There are some good reasons why agents put time pressure on potential clients. One reason has to do with the old saying, “Time is money.” Some agents have to make a two hour drive to a potential client’s house (that’s a four hour round trip). Asking an agent to make a second trip isn’t being respectful of the agent’s time. Another reason for the time pressure is that some clients are chronic procrastinators. Many clients that I see have gone 60 or 70 years of their life without buying life insurance. They have successfully found ways to rationalize not getting insurance for all those years. Allowing a client like that to find more ways of delaying an insurance purchase is unethical. The agent has an ethical duty to push a little in order to get clients to do what is in their best interest. Medical doctors put the same pressure on their patients. However, if an agent is routinely using high pressure tactics, that usually means the agent is doing a poor job educating the client. The need for high pressure tactics seems to disappear when a client is properly educated. High pressure tactics also come with buyer’s remorse, which isn’t good for the client or the agent.