With a guaranteed issue life insurance policy, you get approved for coverage regardless of your health status. Unlike with typical life insurance products, you don’t have to get poked for a blood test, take time off work for a medical exam, or spill every detail about your family history. Instead, you’re approved on the spot. You get the policy almost immediately. In this case, “guaranteed” really does mean guaranteed.
If you’re looking for insurance, this probably seems like a pretty attractive process. After all, if you can avoid intrusive tests and questions that are going to suck lots of time out of your week, why wouldn’t you choose this option? Is guaranteed issue life insurance too good to be true, just like calorie-free ice cream? To answer this question, let’s take a step back and talk about the core concepts insurance companies use to price their products.
Since the first known insurance contract was written in 1347 (yes, insurance is that old), insurers have relied on a concept called the law of large numbers to provide coverage while minimizing risk. It may be called a law, but don’t worry—it’s not as intimidating as it sounds. The law of large numbers is based on a simple idea. Although it may be very difficult to predict the outcome of an individual event, it’s easy to predict the average outcome of lots of events.
That’s almost as abstract as a painting in a modern art gallery. So let’s make it more concrete with an example. If you flipped a coin once, it would be very hard to be sure about whether it would land on heads. But if you flipped a coin 1 million times, you could be very confident that it would land on heads close to 50% of the time.
In the context of insurance, it’s very hard to correctly predict the exact age at which a person will die. But it’s pretty easy to predict the average age at which a large group of people will die.
By selling a large number of policies, insurers know they’ll underestimate the age of death for some policyholders (and, therefore, lose money on these policies). But they’ll overestimate the age of death for others (and, therefore, make money on these policies). This technique is called risk pooling. Risk pooling lets insurance companies almost guarantee the number of claims they’ll need to pay out in any given year.
Because of risk pooling, insurance companies don’t need to worry about knowing exactly when you, your second cousin, or firefighter Bob will die. Instead, they try to figure out how to group similar people into risk categories.
To place people into risk categories, insurance companies rely on a process known as underwriting. Remember those blood tests, medical exams, and family history questions we talked about earlier? This is what they’re for. These tests and questions give insurance companies information about your demographics and health characteristics. This includes your age, gender, smoking status, height, weight, medical history, and blood test results. And what do insurance companies use it all for? To place you into a group of people with similar characteristics.
Why is underwriting so detailed that it feels as intrusive as going through the full-body scanner at an airport? The more information insurance companies have about their policyholders, the better chance they’ll have of placing them in the right groups. And if they group people successfully, they’ll be able to accurately predict the group’s average age of death. This is what helps them minimize their risk. (Insurance companies have no interest in being daredevils.) It also helps them price your policy precisely.
What happens when your insurance company doesn’t know anything about your medical history? Such as when you apply for guaranteed issue life insurance? It’s extremely difficult for them to price your policy. And because insurance companies aren’t in the business of giving away free money (if only), they make up for the lack of information by placing guaranteed life insurance applicants into the highest-risk groups. In other words, if you want to be automatically approved for coverage without providing any medical information, insurance companies will just assume your health is poor and charge you high premiums. What they say is true—everything comes at a price.
Being automatically placed into one of the highest-risk groups isn’t much of a problem if your health actually is in the bottom percentile. But if you don’t belong in this group, you’ll have to pay a hefty price to receive an automatic approval, a price we highly recommend against paying.
Just how much might you overpay by? We tested this out by comparing the price of a guaranteed issue life insurance policy against a standard term life insurance policy. For $500,000 of coverage, a healthy person would pay $85/month (or $1,020/year) for the guaranteed issue life policy. In comparison, this same person would pay $30/month (or $360/year) for the exact same coverage with a standard term life policy. This is less than half the cost of the guaranteed issue life policy (and more than enough for a fancy dinner out or a decent shopping spree).
For many people, overpaying for coverage is an unfortunate reality of the current life insurance environment. But at PolicyMe, we believe it doesn’t have to be. We’re on a mission to bring the insurance industry into the 21st century, challenging every status quo that’s long been accepted as an inevitable truth (and there sure are many).
In the age of advanced analytics and machine learning technology, we know there must be a way to design an instantaneous underwriting process that’s significantly better for the customer without being riskier for insurance companies. (After all, we have cars on our roads that can almost drive themselves.) We’d never suggest that information isn’t critical to understanding risk, but we do believe the industry should, and must, be smarter about how it’s collected.
Follow our blog to stay connected with our company and track our progress as we make life insurance faster, easier, and (dare we say) more enjoyable to get. Our goal is to create a whole new insurance industry that puts its customers first, and we’d love your valued input and support to guide us on our journey.