How Many Life Insurance Policies Can You Have?
B.A. Risk Management
Life Insurance Agent
Having more than one life insurance policy might sound illegal. Actually, it's a common strategy for policyholders. Just like you might want to diversify your assets to safeguard your finances, having multiple life insurance policies can be a good strategy for some policyholders.
It can help you maximize their benefits and protect their families for the long term. Read on to find out if this strategy is a good fit for you and what you'll need to know if you choose to go this financial planning route.
Is It Legal to Have Multiple Life Insurance Policies?
Believe it or not, it's perfectly legal to have more than one life insurance policy. Insurance companies want to insure as many customers as they can, and industry regulations allow customers to have policies with multiple companies.
Even though you can technically apply for policies with multiple life insurance companies at once, this usually isn't the smartest move. You'll want to space out your applications for the best results. Since companies check your information through the Medical Information Bureau it can cause delays if you apply for multiple policies at once. In some cases, it might even result in a denial from all the companies in question, since it may look like you're trying to apply for more coverage than your income and assets allow for.
Spreading your coverage across several policies won't increase your insurability, however. Your total death benefit across all your policies will still need to be an amount that makes sense for your income and assets, or else you won't be approved for policies. If your total coverage would exceed 20 to 30 times your income, this might look suspicious to insurers. It could increase your chances of having applications rejected since companies will wonder why you'd need such a disproportionate amount of coverage and how you'd be able to afford your premiums.
Why Might Someone Carry Multiple Life Insurance Policies?
There are several reasons someone might choose to apply for multiple life insurance policies. Maybe you're looking for additional life insurance coverage due to a major life change, such as marriage or childbirth. While it's usually best to increase your existing coverage limit, under certain circumstances, it might be easier or cheaper to purchase a second life insurance policy.
Many people also take out additional life insurance policies for financial strategy reasons. For instance, if you're a small business owner, a second life insurance policy could help cover your business loans or fund a buy-sell agreement. If you're savvy with finances, you can use multiple life insurance policies as part of a financial planning strategy known as the ladder strategy, which involves staggering the term ending of several short-term policies to help you pay down your debts.
Term and Whole Together
When you're selecting a life insurance policy, you'll have the choice between taking out a term life insurance policy and a whole life insurance policy. Term life policies cover you for a set amount of time, usually between one month and 30 years, while whole life policies insure you for your entire life and can be borrowed against for cash value. To avoid losing insurance at the end of a term life policy, some people decide to purchase a whole life policy while their term life policy is still in effect. This can be a good choice for people looking to save money on life insurance policies. It allows you to increase your amount of insurance for your beneficiaries without having to cancel one policy and restart another at a much more expensive rate due to increased age.
Multiple term life policies
Some people also choose to take out multiple term life insurance policies to cover separate needs as their lives change over the years. For instance, you might add a second term life insurance policy to provide additional support to your partner after childbirth. If you died during the years your children were still dependent on your spouse, your family would receive two death benefits rather than one. You might also purchase shorter-term life insurance policies set to expire at the end of certain life events, such as the end of the term of a mortgage.
What is a Laddering Strategy?
Purchasing multiple term life insurance policies set to stagger at different lengths and amounts to match your financial needs over time is known as a laddering strategy. For example, instead of purchasing one 30-year $1 million policy, you might purchase a 10-year policy for $500,000, a 20-year policy for $300,000, and a 30-year policy for $200,000. If you're careful with financial planning, you could set these to end at the end of major life chapters like paying off your mortgage and your children going off to college. Depending on your coverage needs, this might save you significant amounts of money over the long term in comparison to taking out one large whole life policy.
Using a laddering strategy can also help you if you're worried about meeting your premiums throughout your lifetime due to fluctuating income. If you have a single life insurance policy with a higher premium and you lose your job, you'll be in danger of your policy lapsing. But with a laddering strategy in place, you could let one policy lapse if you needed in an emergency and still have coverage with another.
Additional Policies versus Adding to a Policy
If you're trying to decide whether multiple policies are right for you, you should first consider your risks in applying for a new policy. If you've aged considerably since taking out your first policy, or your health has declined since your last insurance medical exam, you might be offered a much higher rate for your second policy than your premium for your current policy. In that case, adding to your current life insurance policy might be a better choice than laddering.
If you're looking to gain additional coverage because of a life change like marriage or childbirth, you might also want to consider adding a rider to your current policy. Ask your life insurance company what riders are offered for your policy type and what additional costs you might incur. By adding a rider to your policy, you can add additional benefits for your spouse or children without having to pay the full premium amount of a second policy.
The Bottom Line
Depending on your coverage needs and skill with financial planning, taking out multiple life insurance policies might be a good choice for peace of mind for you and your family's future needs. If you're interested in seeing what policies you qualify for, check out our free tool to help you compare quotes and find the best policy fit for you.