Is No Medical Exam Life Insurance Worth It?

Don't buy "no medical exam" life insurance without reading this.

When purchasing life insurance policies, most applicants go through a process called medical underwriting.

During this process, the life insurance company reviews health information to assess the risk of having to pay out the death benefit. Insurers frequently require the applicant to undergo a life insurance medical exam as a part of this.

Some insurers, however, do not require a person who is applying for coverage to see a doctor. Policies without a required health assessment are often called "no medical exam" life insurance coverage. But are these kinds of policies worth buying?

Types of "no medical exam" life insurance

Not all life insurance policies that waive the medical exam requirement are the same.

Traditionally, the only insurers that don't require a medical exam are those offering something called "guaranteed issue coverage." With guaranteed issue policies, not only is no exam required, but the applicant also isn't required to offer a detailed health history either. The coverage is available to anyone regardless of their medical status.

However, a small number of new insurance companies have cropped up that offer traditional coverage without an exam. These are not guaranteed issue plans, and health history matters; the exam is simply eliminated. These insurers use algorithms and publicly available information to determine the risks of offering coverage. They will generally ask for, and take into account, an applicant's full medical history. Policies are not guaranteed for everyone with these plans.

When an insurer offers standard term life coverage without an exam using this approach, then there's usually little or no downside to getting this kind of coverage as opposed to a policy with more traditional underwriting requirements. As long as the premium price is competitive and the coverage offered is sufficient, there's no real difference between these plans and those mandating exams.

But, that's not the case in the other scenario, when the insurer is offering a guaranteed issue plan specifically.

Is guaranteed issue coverage worth purchasing?

Guaranteed issue plans have some big downsides over standard coverage. For example:

• Premiums may be higher relative to the amount of protection provided.
• There's usually an upper limit on how much the insurer would pay out for the death benefit (and it may not be very high -- it could be as low as $25,000 or $50,000).
• The death benefit is often a graded death benefit. This means beneficiaries generally receive only a portion of the amount, depending on when the death occurs. For example, the beneficiaries might get 10% of the death benefit within the first year the policy is purchased, 20% in year two, 50% in year three, and the full benefit amount only if the policyholder dies after more than three years have passed.

This means those who buy guaranteed issue life insurance with no medical exam could pay a lot for little protection -- especially if they pass away soon after getting their policy.

Still, having some life insurance is typically better than having none at all -- especially for those with small estates who may not have enough money to cover their funeral or provide any help to their surviving loved ones.

So, for those who are not facing imminent death (in which case the graded death benefit would mean loved ones would get very little), buying a guaranteed issue policy could be a good last resort if no insurer requiring medical underwriting will issue them a policy.