Should you have more than one life insurance policy?

Owning two or more life insurance policies

You may be surprised to learn that it is actually not that uncommon to own more than one life insurance policy. This is because many employers offer life insurance to employees free or very inexpensively. Keep in mind, though, that employer-provided policies are often limited. They may only offer a small amount of coverage, perhaps enough to cover a funeral or some small debts. In addition, once you leave a job, any life insurance coverage that came with it typically ends.

Therefore, people who have dependent children or other serious financial obligations often purchase a second life insurance policy of their own. But that isn’t the only reason people have more than one life insurance policy. Some people deliberately purchase two or more life insurance policies as a financial strategy.

Benefits to multiple life insurance policies

If you already have a life insurance policy and you take on a new obligation, such as a second child or business loan, it could be possible to increase your coverage. However, depending on the insurer and the policy involved, this could involve taking a medical exam and going through underwriting a second time. In some cases, it may just be less expensive to simply buy a second life insurance policy.

For example, let’s say you already have a whole life insurance policy to protect your family. Then you decide to start a business, so you take out a business loan you expect to pay off in 10 years. You’ve added a financial responsibility that could possibly become a burden to your family if they lose you. So, you might want to help protect them with additional life insurance. In this case, it might make sense to simply take out a second life insurance policy that ends in ten years, when you have paid off the loan.

“Laddering” insurance policies

You may even decide to pursue a strategy called “laddering.” In this case, you would purchase several different term life insurance policies to cover your needs at different stages of life. Let’s look at one example:

• A 30-year life insurance policy worth $40,000 to help cover the payment of your mortgage
• A 20-year term policy worth $50,000 if you have children, who need financial support
• A 10-year term policy worth $10,000 to help cover a period of serious financial concern, such as starting your own small business

Purchasing multiple limited-term policies in this way could be less expensive than purchasing one large, long-term policy to cover everything.

Of course, this all depends on your health and age at the time you purchase each policy. If possible, it is generally best to purchase any life insurance policy while you are younger and in good health.

Hazards to two or more life insurance policies

Buying multiple life insurance policies in order to save money also carries some risks.

As mentioned previously, insurance policies are typically more affordable for people who are younger and healthy. This may tempt you to apply for several insurance policies at once, but this could actually make it more likely that your application could be rejected.

Almost all life insurance companies upload the data about their policies and applicants to the Medical Information Bureau, or MIB. While it is legal to hold multiple life insurance policies, generally insurers won’t cover a person beyond their real expenses and needs. Insurers could become suspicious if it looks like you are applying for multiple policies at once to get a very large amount of coverage.

Even if you apply for policies over a period of years, juggling the premiums from multiple policies could be tricky. For this reason, if you want to purchase multiple policies, it may be wise to work with an insurance broker or agent who could help you manage the process.

Alternatives to an extra life insurance policy

An alternative to an extra life insurance policy is something called an insurance “rider.” This is an amendment to a life insurance policy that allows you to add coverage.

It could be possible to get riders to insure your spouse, to increase your total available coverage without a medical exam, or to convert a term life policy with an expiration date into a whole life policy that is permanent. Not every insurance policy offers riders, and riders could vary from company to company. They could also raise your premiums.

Be aware that riders could also offer less coverage than a separate policy would. To get a sense for whether a rider would meet your needs better than multiple life insurance policies, you might want to consult an insurance specialist.