Multiple Life Insurance Policies for the Same Person

Is it possible is to have multiple life insurance policies for the same person?

It sounds a bit illegal, doesn’t it?

But actually, it isn’t. Not only is a perfectly legal, but in many cases, it’s highly desirable.

Let’s look at some of the reasons why you might have multiple life insurance policies for the same person.

Multiple Life Insurance Policies = More Life Insurance Coverage

This is the most basic advantage. If you have one policy for $200,000, and you have a second policy for $200,000, you have $400,000 in life insurance coverage. For most people, having more life insurance is an outstanding idea. In fact, most people have the opposite problem – they don’t have nearly enough life insurance.

There are other ways to add additional life insurance later. One would be to have a provision in your first policy that would allow you to purchase additional coverage. If you didn’t add that option on your first policy, the next best strategy is to add a second policy.

Having a Base of Permanent Life Insurance + Term Life Insurance Policies

Permanent life insurance – whole life, variable life and universal life – are expensive policies. In fact, they can be prohibitively expensive. Most young people won’t have room in their budgets to purchase a large permanent life insurance policy. Since they can cost thousands of dollars for larger policies, you might limit a whole life policy to no more than $100,000.

That can serve as a foundational life insurance policy. But as your life expands, so will your need for life insurance coverage (e.g. Protective Life Insurance). For example, once you get married, you’ll need to leave money to your spouse. And once you have children, the need only gets bigger.

At that point, the $100,000 whole life policy will be insufficient. You might want to add a second or third term policy that will increase your coverage by several hundred thousand dollars. The combination of the whole life policy and one or more term policies will be less expensive than having a single, very large whole life policy.

Not Having All Your Eggs in One Basket

Do you know how it’s commonly recommended that you diversify your investment portfolio?

It’s even a good idea to diversify your income sources. The basic idea is to have more than one of everything – investments, income sources, etc. That’s not a bad idea when it comes to life insurance either.

It’s very rare that a life insurance company fails. But if yours ever did, you’d be wishing you had an additional policy with a different company.

But there’s another scenario that’s much closer to home.

Let’s say you have a life insurance policy that has a particularly high premium. You lose your job, and you’re unable to pay the premium. You’re now in danger of your insurance coverage lapsing. That would leave you uninsured, at least until you got back into a position to get a replacement policy.

But if you have a second policy, and lapsed on the first, you’d still have coverage. And when you replace the first policy once you’re re-employed, it’ll only be to add to the second policy you still have in place.

Multiple Life Insurance Policies for Multiple Needs

Life insurance fills different needs. For example, the most basic policy pays for your final expenses – funeral arrangements, unpaid medical bills and the like. You might have another policy to pay off your mortgage, and still, third that you have to pay for your children’s college education in case you die before it happens.

That’s one of the big advantages of life insurance. There’s no such thing as one size fits all, so you can set up individual policies to cover very specific needs.

This is much more cost-effective than you might think.

For example, if you need coverage for your mortgage, and you have 20 years remaining on the loan, the coverage will no longer be needed when the loan is paid. If your children are eight and 10 years old, you might need a larger amount of life insurance to cover the college years. But in about 15 years, that will no longer be necessary either.

By contrast, if you take out a $1 million whole life insurance policy when you’re in your 20s – so that you can cover all of those contingencies – you’ll be completely over-insured by the time you reach your 50s. At that point, you’ll be paying for more life insurance than you actually need.

This is one of the most important benefits of term life insurance. Not only is it a lot less expensive than permanent life insurance, but you only need as much as necessary, and only for a certain amount of time. After that, you can cancel the policy, or reduce the death benefit to make it more affordable.

Buying Life Insurance as You Can Afford it

In a perfect world, everyone would purchase at least $1 million in permanent life insurance before they turn 30. But as we all know, this isn’t a perfect world. Most people can’t afford the cost of a $1 million permanent life insurance policy.

Life insurance is best purchased in layers. You purchase a relatively small amount, and then add additional coverage as the need arises, and as your ability to afford it increases.

For example, you might take $100,000 policy when you’re fresh out of college. You might then take an additional $200,000 when your first child is born. You can also add another $200,000 when a second child is born.

Now if you were earning $35,000 per year when you take the first policy, $100,000 may be all you can afford. But if you’re making $75,000 by the time your first child is born, you can more easily afford to add the second policy.

Laddering Multiple Term Life Insurance Policies

Laddering is a strategy that takes advantage of the various term lengths of term life insurance policies. It works something like this:

• You take a 30-year term policy for $300,000 for the benefit of your spouse, to replace your income, should you die before he or she reaches retirement age.
• You take a 20-year term policy for $200,000 to cover your mortgage, which will be paid off in 20 years.
• Then you take a 10-year term policy for $150,000, to ensure that your 15-year-old child will be able to go to college should you die before that happens.

It’s a cost-effective strategy that works very well with term life insurance, but not with permanent insurance. Each level of the “ladder” is kept only as long as it’s needed.

There is One Limit on Multiple Life Insurance Policies…

In the interest of full disclosure, there is one potential limit to the strategy. That has to do with the amount of life insurance you accumulate, in relation to your financial needs.

When you apply for life insurance, each company will consider the amount of coverage you already have. For example, if you have a $400,000 policy, and you’re making an application for a new $600,000, you’ll have a total of $1 million in coverage.

Now if you’re earning $50,000 a year, and you have no spouse or dependents, the insurance company may require you to reduce the amount coverage you’re applying for. They may even decline it outright.

The reason is that $1 million in life insurance is out of all proportion to the financial needs of a person earning $50,000 but has no dependents. The insurance company will be concerned about the reasons for needing so much coverage.

A second concern – that may not be disclosed – is your ability to afford so much life insurance on a relatively modest income. The insurance company may be concerned that you’ll keep the second policy for no more than a year or two. You’ll then be forced to cancel because you can’t afford the premiums.

This is the only limitation on having multiple life insurance policies for the same person. But if you have the financial need, and the ability to afford the premiums, no insurance company will stand in your way.

If you’re interested in adding an additional life insurance policy, give us a call, or complete the brief application to the left of this article. We’ll get you the most coverage for the lowest premium.