Life insurance is one of the most popular insurance policies in the U.S. According to data, about 52% of Americans have life insurance policies. But how many do each have?
Having multiple life insurance policies is odd to many, with unknown benefits. It is possible to carry multiple life insurance policies for various reasons, such as covering coverage gaps in one policy, searching for better premiums while maintaining your old policy, or wanting maximum coverage for your financial responsibilities, such as tuition fees and mortgage.
Adding additional life insurance policies will come at a financial cost. Therefore, it’s a decision you must make carefully, assessing whether adding a new policy or modifying your existing one is the better option.
Here’s a look into multiple life insurance policies and when you might need one.
The Different Types of Life Insurance Policies
There are two primary forms of life insurance policies. These are term life and permanent life insurance policies.
Term Life Insurance
Term life insurance is the most popular type of life insurance policy. It has the most cost-effective insurance rates and covers you for a predetermined period or “term.” This is usually five to thirty years.
Once the “term” of a term life insurance policy ends, you’re no longer protected and can’t receive any compensation from the insurer despite paying premiums for the policy.
Term life insurance policies can be renewed at the end of the term, but the rates will typically be more expensive than the expired policy. The increase in premium rates will often be affected by your health, paying significantly higher for more deteriorated health.
Therefore, term life insurance policies can be prohibitively expensive to renew.
Permanent Life Insurance
Permanent life insurance offers coverage over your entire life. This policy also builds tax-advantaged cash value that can be used in several ways. For instance, you can borrow against your policy’s cash value or use it to make premium payments later.
Alternatively, you can cash out the cash value to help supplement your income in retirement.
Your permanent life insurance rates are often based on your health at the time of taking out your policy. Therefore, unlike term life insurance, health deterioration in later years will not affect your premium rates.
Can You Have Multiple Life Insurance Policies?
Life insurance policies can be purchased in different ways. This includes individually or as a group. Often, you can get group coverage at the workplace, with lower-cost coverage and limited amounts.
In the latter case, it can be wise to consider getting an additional life insurance policy to protect your family adequately.
The decision to purchase an additional life insurance policy is rarely straightforward. While you will probably get better protection for your family, the new policy will be taken later, when you’ll likely be older and less healthy.
Your age and health history significantly affect the premiums for life insurance policies, meaning most additional policies will have higher premiums than older ones.
Depending on your situation, taking this penalty on premiums may be worth it, especially if the insurer does not allow you to adapt your existing policy to your changing needs.
In place of having additional policies, depending on the situation, some insurers may allow you to make significant policy changes such as length or term, switching from joint to single policies, amount of coverage, or changing premium payments from monthly to annually.
Making these changes will impact the cost of your existing policy. Therefore, you should carefully assess the added costs and terms and conditions to determine whether getting a new policy is better.
When Should You Consider Getting Multiple Life Insurance Policies?
What specific instances might make you consider getting multiple life insurance policies? Here are the most common ones.
Estate Planning
Estate planning is much easier with a term and permanent life insurance policy. Instead of expanding your current coverage, you can take out a new term life insurance policy for your family while they’re still depending on your income.
A separate permanent life insurance policy will leave them with money once they no longer rely on your income.
Major Life Events
Having a child, buying a house, or starting a business are major life events that can tilt your financial scales. In most cases, getting an additional life insurance policy to cover these expenses is cheaper than increasing your current policy’s coverage limit.
However, situations may be vastly different. Therefore, you should consult your financial advisor about the benefits of buying a new policy before getting one. This provides an opportune time to conduct a life insurance policy review.
Long-Term Financial Planning
While permanent life insurance policies seem more desirable, in some cases, buying multiple term life insurance policies ending in 10, 20, and 30 years may save you more premiums than a single permanent or term life insurance policy.
This can work if you carry more coverage in the 10-year policy than the 20-year one, which carries more coverage than the 30-year one.
You can structure your multiple policies to provide more extensive coverage at more affordable premium rates. This strategy, called laddering, helps provide more coverage in earlier years when there are more expenses, such as child care and debt, and less in older years when you have less debt and obligations.
Possible Limitations on the Amount of Life Insurance You Can Have
While you can have multiple life insurance policies, there are possible limitations you should be aware of. Often, the amount of life insurance coverage you can get will be tied to your net worth or income.
This also means that the amount of coverage you can get will be limited by your age and insurer. Typically, for adults aged 40 and below, total coverage is limited to 25 to 35 times the annual income. Adults aged 60 to 70 get coverage limited to about five times their annual income.
If you want life insurance for estate planning, your total coverage is often limited to 80% or 85% of your net worth.
Therefore, insurers will always consider your current total life insurance coverage before awarding you a new policy with unique coverage and premiums.
Have an Expert Guide Your Choice
Having multiple life insurance policies can have numerous benefits and drawbacks. Therefore, consult a professional and let them guide you on the best course for improving your life insurance coverage and costs.