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Sep 2, 2014

Beware No Medical Exam Life Insurance

by Glenn Cooke

Glenn Cooke


You've seen the TV commercials—happy, smiling families purchasing life insurance. It's a fast easy process, and rates are advertised as 'affordable.' Why would someone purchase a regular life insurance policy when getting a no-medical exam life insurance policy is so easy and inexpensive?

The answer is that the 30-second TV commercials don't emphasize deficiencies in this insurance as compared to a regular underwritten policy. Let’s touch on a few differences, but first let's start with some definitions.

Definition Of No Medical Exam Life Insurance

  • Fully underwritten policy with medical exam: These policies have a urine and blood test, and a medical questionnaire. They are reviewed by an underwriter.
  • Fully underwritten policy with no medical exam: For lower amounts of coverage and some ages, companies may require only a medical questionnaire. Again, the information is reviewed by an underwriter. Given that there's no urine or blood test, these policies can be considered as no-medical exam.
  • Simplified Issue: These policies have a medical questionaire that is a series of yes/no answers.  These would typically be considered a standard no-medical-exam policy.
  • Guaranteed Issue: These policies have no medical questions at all; everyone is approved.

In the above definitions, there's some grey area as to what defines a medical exam. The common usage is that Simplified Issue and Guaranteed Issue policies are no-medical life insurance policies. However, notice that you can purchase a fully underwritten policy without any blood or urine test (depending on age and coverage amount). For our purposes, we'll assume Simplified Issue  and Guaranteed Issue are no-medical-exam life insurance policies.

Price Differences

In a classic example of marketing, no-medical-exam policies are frequently advertised on TV using the word ‘affordable.' The word they're not using is ‘competitive.'

There's a definite cost to these medical policies. Taking the example of a husband and wife aged 60 in good health seeking $50,000 in lifetime coverage, a medically underwritten policy can be had for $206/month. The least expensive no-medical policy I'm aware of would be $287/month. And the least expensive that I would actually recommend would be $346/month. That's a 50% increase in premiums for the convenience of nomedical-exam policies.

If you're considering no-medical-exam life insurance, be prepared to pay a substantial premium for the convenience.

Coverage Differences

If you listen to the no-medical commercials carefully, you'll sometimes hear the words ‘limited benefits during the first two years.' It's life insurance—what benefits could be limited?

The answer is the death benefit. Some of the nomedical-exam life insurance policies have a 2-year deferral which means no claims will be paid for death due to medical reasons. Accidental death is included for the first two years. Given that companies often give away accidental death life insurance for free, you should get a sense of how valuable that coverage is. So in addition to higher premiums, you're paying premiums for two years before you have full life insurance coverage.

If you are considering no-medical-exam life insurance, make sure you're aware of what's covered and for how long.

Underwriting By Consumers

While we have no proof, concern exists among some agents that no-medical life insurance policy claims may be denied more frequently than a fully underwritten policy.

If so, it's likely because these policies are effectively underwritten by the consumer themselves rather than by a trained underwriter. The consumer is making the decision on how to answer the questions on the medical questionnaire and may be making a judgment call. When it comes time to pay the claim, the insurance company can (and probably will) review the application, and if their opinion is different than the consumer's on how the questions were answered, they will deny the claim.

In practice, I have seen examples where a consumer has answered questions ‘no' where the life insurance company says it must be answered ‘yes'. If this comes out after you pass away, your death claim will be denied.

When seeking clarification on questions, some companies won't even offer an opinion. They'll simply defer the question back to the consumer to decide how they think they should answer—and as noted, they may review and offer a different opinion at time of claim.

When Is No Medical Exam Life Insurance Appropriate?

The insurance companies wouldn't sell much of this stuff if they sold it as ‘expensive insurance that you have to underwrite yourself and doesn't have full benefits for two years.'  So when are these policies appropriate?

If you're in regular good health, or even have a few minor health conditions, you should apply for a fully underwritten policy. That will ensure that you have the best policy features at the lowest possible price. No-medical-exam policies can be suitable if you are older and have conditions that prevent you from getting regular life insurance. Consumers frequently over or underestimate their health conditions, so don't assume that any condition is automatically an issue. Instead speak to a broker and have them evaluate your specific concerns. Remember that some medical conditions that seem inconsequential can derail a life insurance application. Conversely, some conditions that you would expect to be a problem may actually be of no consequence to the life insurance company. Again, check it out with a broker before deciding what type of policy to proceed with.

In the end, be cautious about assuming that a nomedical policy is just like regular insurance but easier to apply for.

Glenn Cooke is a life insurance broker and president of Life Insurance Inc.