Guide to Life Insurance for Those With a History of Mental Illness

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Guide to Life Insurance for Those With a History of Mental Illness Mental health disorders are a significant problem for many people in America. According to the National Alliance on Mental Illness, 1 in 5 U.S. adults experienced a mental illness in 2020. Of these adults, 5% experienced a severe (e.g., schizophrenia, bipolar disorder) mental illness, 1 in 15 experienced both a substance abuse disorder and mental illness, and over 12 million had serious thoughts of suicide.

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The COVID-19 pandemic affected the ability of many people to function normally because of the loss and uncertainty it caused. In turn, this impacts the insurability of these individuals. 

In this article, we’ll look specifically at the challenges people with a history of mental illness have buying life insurance, ways you can purchase life insurance regardless of your mental health history, and answer some frequently asked questions on this timely topic. Everyone deserves to feel comfortable with their coverage. Let’s talk about your options. 

Can You Buy a Life Insurance Policy If You Have a History of Mental Illness, Anxiety, or Depression?

To begin, there is good and bad news when it comes to answering this question.

The good news is that the answer to this question is yes, you can buy a life insurance policy if you have a history of mental illness, anxiety, or depression.

The not-so-good news is that you could be limited to the type of life insurance policy you can buy and what the rates, or premiums, will be. Like any other pre-existing condition, how you manage your mental health and the severity of the diagnosis will affect your purchasing options. The more you understand about life insurance and your options, the better equipped you are to handle anything that comes your way. 

What Are the Best Types of Life Insurance for People With a History of Mental Illness, Anxiety, or Depression?

There are three types of life insurance that people with a history of mental illness should consider: traditional life insurance (term and whole life), guaranteed issue life insurance, and group life insurance. Let’s look at each. If you’ve never looked into life insurance, it’s normal to be a bit confused. 

Traditional life insurance

Traditional life insurance refers to two types of policies, term life and whole life. Term life insurance is the most affordable coverage you can buy because it offers protection for a predetermined period, such as 5,10, or 20 years. It only provides a death benefit to your beneficiary if you pass away during the policy’s term. Unlike permanent insurance like whole life or universal life, term life doesn’t accumulate cash value. 

Though term insurance is generally less expensive than other types of insurance, it does carry a built-in risk. The risk is that if you outlive the policy’s term, you may not be able to qualify for another life insurance policy if you’ve experienced any complications related to your mental illness, such as panic attacks or hospitalization. 

Some term life insurance policies have a guaranteed insurability option that allows you to convert your term policy to a permanent type of life insurance that won’t expire before you die, regardless of your current medical condition. It’s best to consult with a life insurance agent to help you find this type of policy.

Whole life insurance for people with a history of mental illness is more expensive than term life insurance, but it has several advantages. First, whole life insurance builds cash value. Part of every dollar you pay in premiums is deposited into the cash value component of a whole life policy.

The cash value is credited interest at a rate set by the life insurance company, and dividends paid by the insurer can also be added to the cash value, depending upon the company's profitability in a given year. 

Also, whole life insurance won’t expire. Unlike term life insurance, you can keep your whole life policy for your entire life, as long as you continue to pay your premiums. Last, your premiums won’t ever increase. Regardless of how many birthdays you have or how the condition of your mental health changes, your premiums will always remain the same with a traditional whole life policy.

Guaranteed issue life insurance

Guaranteed issue life insurance is another option if you have a history of mental illness and want to buy life insurance. It’s ideal coverage if you can’t qualify for traditional term or whole life insurance. 

Guaranteed issue policies are the most expensive policies you can buy because the insurer assumes a large amount of risk by not asking any questions about your health history on the application or requiring that you undergo a medical examination. 

These policies are usually small whole life insurance policies with limited death benefit amounts ($2,000 to $25,000), though several life insurers offer policies with death benefits of $50,000 or more. Guaranteed issue life policies also come with a “graded death benefit,” meaning that your beneficiary will only receive a partial payment of the death benefit if you die during the policies’ first two years.

For example, if you bought a guaranteed issue policy and died during the first year you owned the policy due to complications from bipolar disorder, your family may receive only the amount of premiums you paid, plus interest. 

Group life insurance

The third type of life insurance you should consider is group life insurance. Group life insurance, also known as employer-sponsored life insurance, is also typically issued without requiring you to provide any health history or undergo a medical examination. For example, regardless of your mental health, group life insurance providers will issue you a policy up to an amount specified in the group policy they have with your employer (typically $50,000).

One drawback of group life insurance is the limited death benefit. Many group life policies only allow a face amount equal to a few times your annual salary, which may not be enough for your family. A financial advisor or life insurance agent can advise you on how much life insurance you need.

Group life insurance is also not portable, meaning that if you stop working for your employer, you won’t be able to take your coverage with you. This can be of particular concern to someone who has a pre-existing condition, like anxiety or depression. For this reason, many financial advisors recommend that people also purchase personal life insurance and keep it in addition to any group life insurance coverage they may have during their working years.

Does Having a History of Mental Illness Affect Premiums or Payouts?

Having a history of mental illness will quite likely affect your premium, but it won’t affect the payout of the death benefit to your beneficiary. 

Concerning premiums, if an insurer decides to issue a policy to someone with a history of mental illness, the insured will generally pay higher than standard rates for their coverage. This is because premiums are based on the type of mental disorder, its severity, age of onset, medications being taken, and many other factors.

Insurance companies evaluate each application on a case-by-case basis when determining insurability and rates. The people who develop the criteria with which underwriting decisions are made are called “actuaries,” who are typically conservative by nature, making them valuable to insurers when determining premiums. 

The good news is that once a policy is issued, the payout isn’t affected by mental illness, like depression or anxiety. A life insurance policy is a binding contract in which the insurance company has agreed to pay a death benefit to a beneficiary named in the policy upon the insured person's death.

Legally, they must honor this agreement regardless of the cause of death unless it is specifically excluded in the policy. How long it takes to get a life insurance payout will depend upon the company that issued the policy.

How to Shop for a Life Insurance Policy If You Have a History of Mental Illness

Many online resources are provided by life insurance companies, agents, and brokers that will give you policy choices and rate quotes. However, if you have a history of mental illness, the best strategy is to find coverage through an independent life insurance agent specializing in helping people with pre-existing medical conditions.

Independent agents get quotes from many different life insurance companies, and if they’re experienced, they often know which companies will accept which types of risks. For example, some companies specialize in issuing life insurance to people with cancer, while others focus on helping people with diabetes.

Frequently Asked Questions: Buying Life Insurance With a History of Mental Illness

Buying life insurance with any pre-existing condition can be complicated, including mental illness. Here are some frequently asked questions about purchasing life insurance with a history of mental illness, like anxiety or depression.

What happens if you get denied coverage based on your mental health history?

If your application to buy a traditional life insurance policy is denied because of your mental health history, you have several options. First, as discussed earlier, consider guaranteed issue life insurance. As the name implies, life insurance companies guarantee that they’ll issue you a policy, regardless of your mental health history. If you apply, you will be approved. 

Remember, you pay more for guaranteed issue life than any other type of life insurance. The insurer will be issuing you a policy without having you take a medical exam and without knowing anything about your health history, which increases their financial risk. 

Second, look into simplified issue life insurance policies. Simplified issue policies fall somewhere between a standard life insurance policy and guaranteed issue life insurance. You will be required to answer several health questions on a short application, but you won’t need a medical examination. 

What happens if you get diagnosed with a mental illness after you’ve purchased a life insurance policy

Once you’re issued a life insurance policy, an insurer can’t cancel your policy or raise your rates if you’re later diagnosed with a mental illness. 

The life insurance policy they issued you is a binding contract, and they’re legally obligated to honor the terms of that policy, including paying your beneficiary a death benefit if you died as the result of having a mental disorder.

Are there any good alternatives to life insurance for someone with a history of mental illness, anxiety, or depression?

There are several good alternatives to life insurance for someone with a history of mental illness, anxiety, or depression: an annuity or savings/investment accounts.

  • Annuity: An annuity is a method you can use to accumulate money for your loved ones to have when you pass away. Deposits made into an annuity may or may not be tax-deductible, based on the type of annuity you purchase. But, an annuity’s growth is tax-deferred, meaning you won’t pay income taxes until you withdraw it.
  • Savings/investment accounts: Traditional savings and investment accounts are another alternative to life insurance. Depending on the type of account, deposits may be tax deductible, and taxes due on account growth won’t be due until money is withdrawn. 

The downside to both of these alternatives is that it can take a long time before the deposits and growth are substantial enough to provide financial security to your surviving loved ones, which is the purpose of life insurance. 

It takes years for compound interest on annuities and investments to build wealth, whereas, with life insurance, you could conceivably make only one premium payment, pass away, and have an immediate estate created for your loved ones.

Reduce Other Risk Factors to Qualify for Life Insurance

If you’ve been diagnosed with a mental illness, the chances are good that you’ll always find it challenging to purchase life insurance. Life insurance companies want to issue policies but are cautious about insuring people with a history of mental illness because of the side effects of some medications used to treat the disease and the increased risk of suicide that mental illness poses.

That being said, there are several things you can do that will help you maintain good health and continue to qualify for life insurance, including taking your medications as prescribed, maintaining a healthy weight, and not using illegal drugs or drinking alcohol excessively. 

You may not be able to change the past and alter the fact that you have a history of having a mental disorder, but you can increase the chances you’ll qualify to buy life insurance today and in the future.

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