Beware of Guaranteed Acceptance Life Insurance

You may have seen the commercials on TV touting “guaranteed acceptance life insurance” for people between the ages of fifty and eighty.  They say that for something like $6.95 a month you’ll get a life insurance policy from a company that will automatically accept you, no questions asked.  This means they won’t ask about your current health, your family health history, your bad habits (whether you smoke, drink, engage in risky behaviors, etc.).  And they certainly imply that your family will be taken care of when the time comes to prepare your funeral and other associated burial expenses.  Does this sound too good to be true?  Well, that’s because it probably is! 

If we’ve learned anything from the “Great Recession”, it’s that money isn’t free, and if someone is trying to portray something as the deal of the century then you should probably run the other way because it’s likely a trap. Guaranteed acceptance life insurance certainly has aspects of that type of shadiness and subterfuge. Just looking at the basic terminology suggests that the insurance company is trying to confuse the consumer: they don’t refer to the insurance in dollars like any other normal life insurance policy like low cost term life insurance, joint term life insurance or return of premium term life insurance. Instead the death benefit of the policy you are purchasing is in mysterious “units.” Instead of a straightforward explanation to consumers, the only explanation for selling a policy in units is to confuse those most at risk, which in this case are seniors who are obviously in distress and looking for their final option to help safeguard their families.

The maximum benefit of guaranteed acceptance life insurance is $20,000, but in reality it’s often much less than that. Most of the people buying a policy of this type are looking to cover the costs of a funeral and burial, which can run on average over $7,000. In most cases seniors would be better off just literally saving the money they are paying in premiums in a regular savings account instead of purchasing this insurance. Unlike in most insurance policies where it’s nearly impossible to pay more in premiums than the death benefit, it is extremely likely in the case of guaranteed acceptance life insurance, especially because this type of policy is a permanent insurance (as opposed to term insurance which lasts for a set number of years) where you must pay the policy premium each and every year.

Another potential negative is that if you happen to die during the first two years of the policy, your entire death benefit will not be paid out to your beneficiaries. In fact, if you die during the first year of the policy, your beneficiaries will likely receive not much more back than the premium you paid that first year plus a nominal amount of interest. If you die during the second year of the policy, they will get roughly 50% of the death benefit. Once you reach the third year, they will receive 100% of the face value.

Guaranteed acceptance life insurance can be useful in some cases, but this is an instance where it is clear that the insurance companies are trying to make money, and you need to beware. If you are healthy and on the younger end of the 50-80 year old range you should steer clear of this type of policy. You will be much more likely to get a good deal with a traditional term life insurance policy, or maybe even no physical term life insurance. If this is the absolute last resort, then you want to speak with your life insurance agent about your options.