These Are the Biggest Downsides of Guaranteed Issue Life Insurance

Consumers should read this before buying guaranteed issue life insurance coverage.

Life insurance is a policy that pays out a death benefit upon the policyholder's death. People buy life insurance for the purpose of protecting family members or loved ones who are dependent on them to provide income or services such as caring for children or aging parents. Without life insurance, survivors left behind could be stuck with thousands of dollars in funeral costs for the deceased -- and could find themselves without the money they need to do important things such as pay a joint mortgage or cover a child's college costs.

Because life insurance offers important protection, it can be disappointing to learn that not everyone qualifies for a standard term or whole life insurance policy. Life insurers request details about health status during the application process, and often even require applicants to undergo a medical exam before they will be approved for coverage. The purpose of this process is to assess the likelihood someone will die during the time the insurance is in effect, or will die soon after a policy is purchased.

The good news is that there is a type of insurance that virtually anyone can get regardless of their medical history -- and even if they have a serious pre-existing condition. It's called guaranteed issue life insurance and, as the name suggests, insurers promise to approve anyone who applies and promise to issue a policy without regard to health status.

While a guaranteed issue policy may sound good to those who are worried their health conditions will interfere with their ability to protect loved ones, there are a few key downsides of this kind of life insurance protection that are worth learning about before buying a policy. Here are three of the biggest disadvantages of guaranteed issue coverage.

The death benefit is often very low

The single biggest disadvantage of a guaranteed issue life insurance policy is that most of these policies have relatively low limits for the amount of coverage available. For example, consumers buying guaranteed issue life insurance may be offered a death benefit only worth around $25,000, while a standard term or whole life policy could provide millions in coverage.

While a small death benefit can be better than no death benefit, the cap on the amount of coverage could mean that family members are left without the full amount of money they need to maintain their standard of living after a loved one dies.

A limited number of insurers offer guaranteed issue policies

Not all insurers offer guaranteed issue life insurance policies, and this is another downside of this kind of coverage. Those purchasing this type of plan may have a narrow choice of insurance providers and, as a result, may end up with very expensive premiums or may find themselves dealing with a company that has a poor reputation for paying claims in a timely and efficient manner.

There's usually a waiting period before the full death benefit is paid

Finally, the last major downside is that guaranteed issue policies often have a long waiting period before the full death benefit is paid out to loved ones. For example, a policyholder may need to have coverage in effect for a full two years before the entire death benefit is paid out.

This means that anyone who has a serious medical problem and who is likely to pass away quickly may end up paying premiums for coverage that does very little to protect surviving loved ones.

For all of these reasons, it's generally best to get a standard term or whole life policy when possible, rather than guaranteed issue coverage. If guaranteed issue insurance is the only option, it may still be worth buying this protection -- but those considering it should be sure to understand the disadvantages and read the fine print to ensure that paying the premiums is really worth the coverage on offer.