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Why I Hate Guaranteed Acceptance Whole Life Insurance

November 17, 2016 at 5:00 AM

I was glued to the TV recently watching the news when an advertisement for Guaranteed Acceptance Life Insurance came on. Whoo boy, did my blood pressure rise. I am not a fan of this type of life insurance. 

Guaranteed Acceptance Life Insurance is designed to appeal to older Americans who want to make sure that when they die there is ample money for their heirs to pay for a funeral, and any outstanding bills, such as medical bills. The big come-on is the guaranteed part: there’s no medical exam. You can have all the pre-existing conditions in the world and you will still be given a policy. No one is turned down.

So what’s not to like? The pricing.  

Oh sure, the ads often make a big deal that you can get coverage for as little as $9 or $10 a month. But that might be for just $1,000 or $2,000 of coverage. If you want $10,000 to cover your funeral costs and some bills, and you are currently 50, you might end up with a monthly premium of $40 or so a month. That’s $480 a year. A 50-year-old woman today has a 50-50 chance of still being alive at age 85. But let’s say she passes at age 75. If she paid $480 a year for the 25 years her total premium cost would be $12,000, so her beneficiaries could get a payout of $10,000. That makes no sense.  

Now of course, if she dies earlier than that, her total payments might be less than the death benefit. But please be aware that if you are very ill these policies are a very bad deal: most will not pay the full death benefit if you die within the first two years of the policy. Your heirs might just be paid the total value of all the premiums you paid,  and maybe an extra 10% or so. 

A far smarter move is to just set up your own “what if” savings account that you deposit money into each month. I realize most bank accounts don’t pay much interest these days, but if you shop for the best online bank deals, you should be able to find federally insured bank deals that currently pay 1% or more. And over the years as rates eventually rise, you will earn even more interest. That’s a smarter deal than a guaranteed acceptance life insurance policy.

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