Yes, you can have more than one life insurance policy. There are no legal restrictions on the number of life insurance policies you can hold, though there could be financial limitations. That’s not to say it’s a bad idea to have multiple life insurance policies — two or more layers of coverage may be the right strategy for you. It really depends on what you need financially and what you can afford.
Read on to learn how you can use multiple life insurance policies to bolster your finances, how many policies it’s reasonable to have, and what to do if one or more of your policies becomes unnecessary at some point down the road.
When does it make sense to have multiple life insurance policies?
The short answer is this: It makes sense to have multiple life insurance policies when you aren’t getting all the benefits you need from just one. This is a fairly common scenario for young families or for anyone who purchases low-cost, group life insurance through their employer. Often, the issue is an insufficient death benefit available through a single policy. Here are three examples.
1. Your base policy doesn’t provide enough coverage
Financial advisors recommend holding life insurance valued at 10 to 15 times your annual salary. That should be enough to pay down mortgage debt and give your surviving family members a running start at establishing their own financial security.
Getting that amount of coverage, however, can be expensive. Many policyholders will take advantage of low-cost, employer-sponsored life insurance to keep premiums affordable. But these policies typically fall short in value — even when you upgrade to the maximum available death benefit. An easy way to address that shortfall is to buy a second policy. This dual-policy strategy using a workplace plan can often be cheaper than buying just one, larger individual policy.
2. You want permanent life plus a high death benefit
Term life insurance is substantially more affordable than permanent life insurance. This is because part of permanent life premiums funds a long-term savings account, a feature also known as cash value. You may like the idea of accumulating cash in your life insurance over time, because that cash can later act as a backup source of liquidity for you.
The challenge is that a permanent life policy with a death benefit equal to 10 times your salary may be out of your reach financially. One solution is to have two policies — a high-value term life policy alongside a smaller permanent life policy. Your term life insurance could take care of your family if you pass away at a younger age. You would structure this policy to expire at retirement, when you are no longer earning a paycheck. The smaller permanent life policy would remain in force indefinitely, building cash value for you to use in your senior years.
3. You want to “ladder” your coverage
Laddering is a technique to provide a high death benefit today that gradually decreases over time. The strategy is appropriate when you have high debt balances that you are actively paying down. Essentially, you’d stack multiple life insurance policies with different terms and face values, so that your total death benefit declines as you repay your debts.
Here’s an example. Let’s say that, after reviewing your mortgage repayment schedule, you decide you need $1 million of life insurance coverage today. But five years from now, you only need a total death benefit of $400,000. And 20 years from now, $100,000 should be enough to pay off your balance. A 20-year, $1 million term life policy would be overkill in this situation. A more affordable approach would be to combine three life insurance policies:
- Policy 1: A five-year, $600,000 policy
- Policy 2: A 10-year, $300,000 policy
- Policy 3: A 20-year, $100,000 policy
Those three policies comprise your insurance ladder. This approach saves on premiums, because it delivers only the coverage you need, when you need it.
How many life insurers can you have?
As with the policies themselves, there’s no legal restriction on the number of life insurance companies you work with. You can ladder or combine life insurance policies from different insurers.
One issue you may face, however, is a higher chance of being denied on future life insurance applications. An excessive cumulative death benefit may prompt insurance underwriters to question your motives. You can’t keep other policies a secret, either. You will have to disclose all existing, in-force life insurance policies every time you apply for new coverage. Unless you’re carrying a very high debt balance, prospective insurers may be suspicious when your cumulative death benefit gets to be 20 times your annual salary or more.
Riders as an alternative to multiple insurance policies
Having multiple life insurance policies may be less expensive than one big policy, but there may be an even cheaper option: riders. Riders are policy amendments you can use to customize your coverage. They do raise your premiums, but the increased cost may be less than what you’d pay to have more than one policy. Three popular life insurance riders are:
- Term rider. Term riders are available on some permanent life policies. The rider essentially increases the policy’s death benefit for a specified period of time. The result is a single policy that has the features of term life and permanent life combined.
- Long-term care rider. A long-term care rider allows the insured to receive monthly income payments if he or she is diagnosed with a medical need for nursing home care.
- Return of premium rider. Available on term life insurance, a return of premium rider refunds premiums paid if the insured does not die while the policy is in force.
What should you do if you need to get rid of extra policies later on?
Life insurance can be a tricky asset. To decide on the amount of insurance you need, you have to make several assumptions about how your finances will evolve over time. Often, real life can turn out differently than you’d planned. You might achieve financial independence unexpectedly, for example, by winning the lottery or launching the next big social media app.
That may create a situation where you have life insurance policies you no longer need. Too many policyholders in this scenario will lapse, expire, or surrender the unnecessary coverage. But doing so can often leave a lot of money on the table. A better option is to find out first if any of your policies are eligible for life settlements, which can produce very high cash payouts — as much as 60% of the policy’s death benefit.
A life settlement is the sale of your life insurance to a third-party. Many types of life insurance qualify. In some cases, you may need to convert term life insurance into permanent life coverage to secure a high life settlement payout. But no matter what type of life insurance you have, the Harbor Life Settlements team can review your policies and their value, and also share the steps you can take to access that value. Contact us today to learn more.