On the surface, life insurance seems simple enough in that all products follow the same general setup: You pay the insurer premiums, and if you pass away, the insurer pays your heirs a death benefit. But there are different types of life insurance, and how the products differ isn’t always made clear in a 30-second commercial. In fact, TV ads leave a lot of key information out of the picture. Here’s a better way to get a handle on these products so that the next time you see an enticing ad for life insurance, you’ll know whether it sounds too good to be true.
Guaranteed issue. The most common TV ads are for guaranteed-issue life insurance policies, says Kelly Maxwell, owner of the insurance brokerage Senior Mutual in Pflugerville, Texas. Because these policies have no medical exam or health underwriting, anyone can qualify for them easily. “Insurers can potentially set up a policy in five minutes over the phone,” Maxwell says, with coverage lasting for life.
If you’re reasonably healthy and willing to take a medical exam, there are cheaper options. In fact, even applicants with moderate health conditions, like high cholesterol, may qualify for a lower price after taking a health exam. Buenger ran the numbers recently for a healthy 70-year-old man and $10,000 of life insurance to cover funeral costs. The premium for the policy requiring a medical exam was $67 a month, but a guaranteed-issue policy charged $99 a month, nearly 50% more. Guaranteed-issue policies are often used to cover funeral costs because the amount of coverage you can buy is limited, usually up to a maximum of $25,000, whereas policies with a medical exam could insure you for six or even seven figures.
There are other drawbacks. Guaranteed-issue policies don’t pay out a death benefit during the first few years. For example, a policy might state that if you die for any reason within three years after purchasing it, your heirs will only receive the premiums plus interest back, not the listed death benefit. “Insurance commercials tend to gloss over these downsides,” says Rafael Rubio, president of Stable Retirement Planner in Southfield, Mich. “While there is a place for guaranteed issue when applicants cannot qualify for other policies, people who could meet life insurance health standards would receive a better offer by applying with a medical exam.”
Term life. Life insurance that requires a health exam typically falls into one of two categories: term or permanent. Term is temporary life insurance. It lasts anywhere from one to 40 years depending on the term, with the quoted rate guaranteed only for the length of that term. If you outlive the term, the coverage ends.