Q&A: Is Colonial Penn life insurance a scam?
Question from Carol: My mom is 75 years old and she's worried about my brother and me having to pay her burial expenses after she dies.
We've told her that she doesn't have to worry about that but she insists on getting insurance to cover her burial expenses.
I keep seeing ads on TV that say Colonial Penn will sell life insurance to anybody for just $9.95 per month, even if they're as old as 85.
They also state that your premium will never go up. It'll always stay at $9.95 per month.
How can they do that? If it's true that sounds like something we could get for her. But I'm leery because it sounds like it has to be a scam. Is it?
Rick's answer: Carol, I have personal experience with Colonial Penn's Guaranteed Acceptance Life Insurance program because my dad had a policy with them for many years before he passed away.
I can tell you with 100% certainty that the program isn't a scam because they indeed pay off according to the terms of the purchased plan and the premium really does stay the same.
That's the good news. But there's bad news as well...
The $9.95 per month premium referred to in those commercials only buys what Colonial Penn refers to as "one unit" of life insurance.
Unfortunately, anyone wanting to buy enough insurance coverage to cover their burial expenses is going to need to buy several units instead of just one.
The benefit amount provided for each unit purchased depends on the insured person's age.
The older the person is, the less their beneficiary would receive for each unit they purchased.
Let's take a look at how this situation would apply to your mom...
The number of units your mom would need to buy to cover her burial expenses would depend on how much she expects her funeral to cost when that time rolls around.
These days it isn't unusual for a funeral to cost $10,000 or more. Therefore, we'll use $10,000 as the amount of insurance your mom would need to purchase for the calculations below.
I went to Colonial Penn's website and posed as a 75 year old female in order to get a quote for a guaranteed acceptance life insurance policy.
The quote I received for a 75 year old female offered a benefit amount of $762 per unit of insurance purchased.
Bear in mind that the quote your mom receives might well be different because rates vary from state to state, but you can expect your mom's quote to be somewhere in the ball park of $762 per unit.
Based on that quote, your mom would have to pay $9.95 per month for every $762 worth of coverage that she wanted to purchase.
Using the $10,000 funeral cost we mentioned above as an example, your mom would need to purchase 14 units of insurance coverage ($10,000 divided by $790 roughly equals 13.12).
Since each unit costs $9.95 per month, your mom would be required to pay $139.30 per month to receive a total benefit amount of $11,060.
As you can see, your mom would end up paying a LOT more than $9.95 per month in order to have Colonial Penn cover her funeral expenses after she passes on.
And now I must mention another point that needs to be considered...
These guaranteed acceptance policies don't fully go into effect until two years have passed.
If your mom were to pass away at any time within two years from the date on which she signed up for her policy, Colonial Penn wouldn't pay the total benefit amount of $11,060.
Instead, the beneficiary would receive a refund check for the total amount of the premiums your mom had paid to date.
In other words, the beneficiary would simply get your mom's money back (plus a little interest) along with a condolence note.
If your mom were to pass away after making 23 monthly payments (one month less than the two years required for the policy to fully take effect) the beneficiary would receive a check for $2975.05 (i.e. $129.35 times 23) plus whatever interest her premium payments had earned up until that point.
Well, those are the facts according to Colonial Penn's website and terms, Carol.
Your mom, your brother and you will probably need to get together and discuss whether this deal would be a good one for your mom to make.
Bottom line: Colonial Penn's Guaranteed Acceptance Life Insurance plan is completely legitimate, but the premium your mom would have to pay to cover her burial expenses is far greater than $9.95 per month.
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