Guaranteed issue life insurance

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No price appears on this page, and none is sent by email. What a contract costs depends on the person and the design, and no honest figure can be produced from three answers.

What decides a guaranteed issue contract

• No health questions at allNothing about health is asked and no exam is required. Eligibility rests on age and on the maximum amount the insurer will issue.
• The waiting period is written into the contractA death from illness during the first years, usually the first two, returns the premiums paid rather than the full benefit. Death by accident is generally covered from the first day.
• It exists for a specific situationIt is the route used when health closes the other routes. What it can sensibly be compared with is the coverage that would actually be issued, not a fully underwritten policy.

What guaranteed issue life insurance actually is

Guaranteed issue life insurance is a contract an insurer has agreed in advance to issue to anybody who applies within the issue ages it sets and meets its basic residency conditions. There is no health questionnaire, no examination, no request to a doctor and no decision to wait for. A diagnosis, a treatment, a prognosis: none of it is asked about, and none of it can be used to refuse the application.

In exchange for that, the contract does not pay the full death benefit straight away. For a period the contract sets, running from the day the coverage takes effect, a death from any cause that is not accidental generally produces a return of the premiums paid, commonly with interest at a rate stated in the policy, rather than the amount printed on the front of it. Once that period has run, the full amount is payable in the ordinary way.

That deferral is the product. Everything else about a guaranteed issue policy is unremarkable: it is usually permanent coverage, the premium is usually level, there is an owner and an insured person and a named beneficiary, and the money is paid the way any life insurance money is paid. The deferral is the single feature a buyer has to understand, and this page exists so that nobody signs one without understanding it.

It is sold under several names. Final expense coverage, funeral insurance, acceptance guaranteed coverage, and whatever a particular advertisement calls it. The name changes and the mechanism does not, so the way to identify one of these contracts is not by its name but by looking for the clause that defers the benefit. It is the wider category of life insurance issued without a medical examination that sets the context for all of this, and the other road out of it is simplified issue.

What no health questions means, and what it does not mean

What it means is exactly what it says. The insurer will not ask about health and cannot decline the application on health grounds. A person under treatment for a serious illness, a person who has been declined elsewhere, a person whose file would be closed at the first question on a simplified issue application: all of them can obtain this contract, and that is genuinely unusual in insurance.

What it does not mean is that the contract has no conditions. The issue ages are real. Each contract states an age below which and an age above which it will not be issued at all, and outside that window the answer is no regardless of health. Residency conditions are real. The deferral is real, and it applies to a person in perfect health exactly as it applies to a person who is not.

It also does not mean the insurer has stopped assessing risk. It has simply moved the assessment out of the application and into the structure of the contract. An insurer that cannot ask has to assume, and the deferral is the mechanism by which it manages what it has chosen not to know. Understood that way, the waiting period is not a penalty aimed at the buyer. It is the price of the door being open at all.

And it does not mean nothing is verified. The insurer will still confirm identity and age, and an age stated inaccurately is generally dealt with by adjusting the benefit to what the premiums paid would have bought at the correct age. That is the one factual answer on the application that can still change what a family receives.

The deferred death benefit, which is the whole of it

This is the section that matters. If a reader takes one thing from this page, it should be this one, and if a household is about to sign a guaranteed issue application it should read the clause in its own contract before it does.

The clause goes by several names. Deferred death benefit, graded death benefit, limited benefit period, waiting period. Different insurers use different words for it and the words are not interchangeable, so the contract has to be read rather than the brochure.

It takes two shapes. In the deferred shape, no part of the death benefit is payable during the period, and what the insurer pays instead is a return of the premiums received, generally together with interest at a rate the contract states. In the graded shape, a rising portion of the death benefit is payable as the period runs, so a death partway through produces part of the amount rather than the premiums. Both exist in the Canadian market. Which one applies is a question for the contract, and it is a fair question to ask out loud before anything is signed.

The clock starts on the effective date of the coverage, not on the date the application was signed and not on the date the first payment was taken. Two things restart it, and both catch households by surprise. A policy that lapses and is then rewritten as a new contract starts a new period, at the insured’s age at that point. A policy replaced by another guaranteed issue contract, for any reason including a lower premium elsewhere, also starts a new period. A household that has already served the wait has something valuable, and replacing the contract throws it away.

What this means in practice can be stated without any figures at all. If the money is meant to pay for a funeral and the insured person is frail, the contract may not do that job in its early years. It will return the premiums with interest, which is not nothing and is not a funeral. The family that expected the death benefit and receives the premiums back is the family this page is written for, and the difference between those two outcomes is the reason to read the clause first.

The corollary is more cheerful and is worth stating with equal force. Once the period has run, the contract pays the full amount for any covered cause, and a person who was uninsurable everywhere else now has permanent coverage that cannot be taken away for reasons of health. Time is the whole cost, and time passes.

The accident exception, and why it is thinner than it sounds

Almost every guaranteed issue contract pays the full death benefit during the deferral period if the death was accidental. That exception is genuine and it is worth knowing about, but it is narrower than the ordinary meaning of the word suggests.

Accidental is defined in the contract, and the definition usually requires a death that results directly and independently of all other causes from a sudden, external, violent and unforeseen event, occurring within a stated number of days of that event. Each of those adjectives excludes something. Anything arising from illness or from natural causes is outside it by definition, and so, in most contracts, is a death connected with alcohol or drugs, a self inflicted injury, an act of war, taking part in a criminal offence, and aviation other than as a fare paying passenger.

The plain statistical point is the one that matters to a household planning around this. Most deaths are not accidental, and the deaths of older people with health conditions, who are the people most likely to buy this contract, are overwhelmingly not accidental. A family that reassures itself with the accident exception is planning around the less likely event and leaving the likely one uncovered.

Read the exception as what it is: a useful provision that occasionally rescues a family, and not a repair to the deferral.

What the contract is once the waiting period has run

After the deferral, a guaranteed issue policy behaves like any other permanent life insurance contract. The full amount is payable on death from any cause the contract covers, the beneficiary named on the policy receives it, and the reason for the death is no longer relevant except for the ordinary exclusions every policy carries.

The coverage is normally permanent, meaning it does not end at a stated age the way a term contract does. The premium is normally level. What differs between contracts is how long the premiums are payable: some are payable for the whole of the insured person’s life, and some stop at an age the contract states while the coverage continues. That difference is worth finding in writing, because over a long life it changes the total amount a household will pay by a great deal. Our page on permanent coverage sets out how the permanent shapes differ from one another, and term to 100 describes the shape that has no cash value by design.

Some of these contracts accumulate a cash value and many accumulate little or none, because the amounts are small and the cost of insurance inside them is high. Where there is a cash value and the owner asks the insurer for a policy loan, the loan is made by the insurer, the interest on it is owed to the insurer, and any amount outstanding at death reduces what the beneficiary receives. Nobody is borrowing from themselves, and a contract of this size is rarely a sensible source of a loan in any event.

A guaranteed issue contract is not normally a participating policy. Where a contract does pay dividends, they are declared annually at the insurer’s discretion and are not guaranteed, which is set out on the participating whole life page rather than here.

Why the cost for each dollar of protection is high

An insurer that asks no questions knows nothing about the people it is insuring, and it has to price for that. The pool contains people in good health, people under treatment, and people who could not obtain a contract anywhere else, and every premium in that pool carries every one of them.

There is a second and stronger force, and it has a name: anti-selection. The person with the strongest reason to buy a contract that asks nothing is often the person who could not survive the questions. That is not a criticism of anybody. It is simply how a market behaves when one side knows something the other side has agreed not to ask about, and insurers can measure it precisely. The deferral is the instrument that keeps the arrangement viable, and the price carries whatever the deferral does not.

Two consequences follow for a buyer. The first is that the coverage amounts available are small, because an insurer will not put a large sum at risk on a life it knows nothing about. The second is that this is expensive protection measured against each dollar it will eventually pay, more expensive than any other route to a life insurance contract in Canada.

A third consequence follows from the first two and deserves its own sentence. On a small permanent contract with a level premium and a long life ahead of it, the total of the premiums paid can approach, and in some cases exceed, the death benefit itself. Whether that can happen depends on whether the contract stops taking premiums at an age or keeps taking them for life. It is an arithmetic question, it is answerable from the contract, and it should be answered before purchase rather than discovered very late in life.

What this money realistically does

The honest description of what a guaranteed issue policy pays for is the set of costs that fall due within days or weeks of a death, at a moment when a household has no appetite for arranging anything and often no immediate access to the deceased person’s own money.

That set is fairly consistent. A funeral or a cremation and the arrangements around it. Transport, sometimes over a long distance. Death certificates and the small administrative costs of proving a death many times over. A flight for a relative who has to come. A small unpaid debt or a final bill. And, quite often, a month or two of a surviving person’s ordinary living costs while accounts are frozen and an estate is opened. Our page on final arrangements and funeral planning goes through what those arrangements actually involve.

What it is not for is equally clear. It is not income replacement, because the amounts are too small and the cost per dollar too high for that job. It is not mortgage protection. It is not an estate plan, and it is not a substitute for critical illness coverage, which pays a living person on a diagnosis rather than a family on a death.

One further distinction is worth drawing because families confuse the two. A life insurance policy is not a prearranged funeral contract. A prearranged contract is an agreement with a funeral provider, governed by provincial rules about how the money is held, that fixes what will be supplied. A life insurance policy pays money to the beneficiary the owner named, and that person then decides what to do with it. Some households assign the benefit to a funeral provider so that the provider is paid directly. An assignment is a legal step with consequences for who controls the money, and it should be understood before it is signed rather than treated as paperwork.

The conditions under which this contract does the job

It does the job when four things are true at once. The person cannot pass the health questions on a simplified issue application, so the faster benefit is not available. The amount needed is modest and has a defined purpose. The household can carry the premium for as long as the contract requires it, in retirement as well as now. And everybody concerned, including the person who will make the claim, understands that the full amount waits.

It does not do the job when the family is likely to need the money in the early years and the death, when it comes, will not be accidental. That is not a matter of opinion or of finding a better insurer. It is what the contract says, and no arrangement of the paperwork changes it.

It does not do the job when the applicant has never actually tested the questions. A person who assumes a diagnosis disqualifies them has bought a waiting period they may not have needed, and the same premium under a simplified issue contract would have bought protection payable from the first day. The way to find out is to apply, and an application that fails costs nothing but time.

And it does not do the job when the premium is a strain. A contract that lapses in year six has consumed six years of payments and delivered nothing, which is the worst outcome available on this page. Sizing the coverage to a premium the household can pay in its leanest year is the practical protection against that.

For an older applicant weighing all of this against the alternatives, the coverage for seniors page sets out the wider picture, and final expense coverage describes the purpose these contracts are most often bought for.

Guaranteed issue beside the contracts it is chosen against

Three routes are realistically open to somebody buying a small amount of coverage later in life, and they differ on who can be refused and on when the money is available.

Reading down the third column and then the fourth shows the trade in its plainest form. Guaranteed issue is the row where nobody is refused, and it is the row where the family waits. Those two facts are the same fact, seen from the two ends of the contract.

Tax, the beneficiary, and the speed that makes this useful

The death benefit of a life insurance policy paid to a named beneficiary is generally received free of income tax in Canada. So is the return of premiums with interest that a guaranteed issue contract pays during its deferral period, although the interest element is treated on its own terms and is a question for an accountant rather than for a web page. Premiums are not deductible.

The designation matters more on this contract than on almost any other, because the entire point of the money is that it arrives quickly. A payment to a named person passes outside the estate: it is not held up by the administration of the estate, it does not attract probate charges where a province levies them, and it is generally beyond the reach of the creditors of the estate. Naming the estate as beneficiary surrenders all three, and turns a fast protected payment into an ordinary asset that waits its turn behind everything else.

The practical consequence is stark. A household that names the estate on a policy bought to pay for a funeral has arranged for the funeral money to arrive after the funeral. That is not a rare error and it is entirely avoidable.

Two further points. Name a person who will actually be in a position to act, and tell that person the policy exists and where the contract is kept, because an unclaimed policy pays nobody. And revisit the designation after a separation, a death or a remarriage, which are the three events that quietly make an old designation wrong.

This is general information about how these contracts work and not tax or legal advice. A particular estate, a blended family or a separation agreement is a question for a lawyer or a notary.

Keeping it in force, which is where most of the value is lost

The largest avoidable loss on a guaranteed issue policy is not a claim decision. It is a lapse. The premium is payable for as long as the contract requires it, and a contract that ends for non payment has taken every premium paid and, where there is little or no cash value, returns little or nothing.

The failure mode is ordinary and mechanical. A payment is drawn from an account that is closed, or from a card that expires, or the person paying moves and the notice goes to the old address. Every contract has a grace period and most have a reinstatement provision that allows the policy to be restored within a stated time on stated conditions, and both are worth knowing about before they are needed.

There is a second reason to be careful, and it is specific to this product. A policy that lapses and is later replaced with a new guaranteed issue contract starts a new deferral period, at the insured person’s age at that point. The years already served are gone. A household that has waited out the period is holding something that cannot be bought back, and it should treat that contract accordingly.

Four ordinary habits protect it. Pay it from an account that will still exist in ten years and that somebody else can see. Tell the beneficiary that the policy exists. Keep the contract somewhere it will be found rather than in a safety deposit box nobody can open. And read any offer to replace it against the deferral clause before agreeing to anything.

The seven mistakes this page exists to prevent

Signing without knowing about the deferral. It is first on the list because it is the one that produces a family expecting a death benefit and receiving the premiums back.

Relying on the accident exception to fill the gap. It pays in full for a death that meets a narrow contractual definition, and most deaths do not meet it.

Buying this without first testing the health questions on a simplified issue application. An application that fails costs time, and one that succeeds buys protection payable from the first day.

Buying more of it than the purpose needs. This is the most expensive protection per dollar available, so an amount chosen loosely rather than against a real purpose is money a household will pay every month for the rest of a life.

Letting it lapse, or replacing it for a lower premium elsewhere, either of which restarts the deferral period at an older age and throws away the wait already served.

Naming the estate as beneficiary on a policy bought to pay costs that fall due within days.

Assuming the policy is a funeral arrangement. It is money paid to a person, not a contract with a provider, and nobody has agreed to supply anything until somebody arranges it.

Questions people ask

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