Life insurance does not seem like the sort of product anyone would purchase in bulk. After all, if you have an insurance policy that will pay out a death benefit to your beneficiaries in the event of your passing, why would you need more than one? However, carrying multiple life insurance policies is permitted by the insurance industry, and there are strategic reasons why you might choose to have more than one policy in place.
Here’s what you need to know about carrying multiple life insurance policies.
Can You Have Multiple Life Insurance Policies?
The short answer: It is perfectly legal for any one individual to be covered by multiple life insurance policies. Although you might worry that insurers will think it’s odd, Maryland-based registered life insurance agent J.D. Elliott said that “the underwriters all have different requirements and ‘raising eyebrow’ levels.” In general, buying multiple policies is common enough that it won’t raise most eyebrows. Underwriters simply want to understand the reason for the purchase.
Why Would Someone Want Multiple Life Insurance Policies?
There are a number of reasons why you might choose to have multiple life insurance policies.
If You Co-Own a Business
“Members in a business partnership [might] buy life insurance on one another so that if one partner were to pass, the other(s) would have the cash on hand to purchase the deceased partner's equity,” said Certified Financial Planner R.J. Weiss. “In this case, it can make sense for someone to have two separate policies”—one that names their business partner as the beneficiary, and a second that names their spouse or other family member.
Since the two policies fill different needs, they can be completely different in terms of death benefit, premium, and even type of life insurance.
If You Want To Top Up Your Employer-Provided Coverage
If group life insurance is part of your benefits package at work, you might think you’re all set. However, when you consider the financial needs of your dependents, you might realize the group policy is insufficient. Buying a supplemental life insurance policy on top of the group life policy from your employer lets you ensure the total death benefit is equal to your family’s needs.
If Your Life Changes
If you get married, have one or more children, or take out a mortgage to buy a house, your family’s financial needs might increase to the point where they outstrip the death benefit on your current coverage.
To ensure your family is financially taken care of in the event of your death, it’s a good idea to review your life insurance when your life changes. Consider whether your current coverage meets your needs, or whether it’s time to increase it.
If You Want To Cover Short- and Long-Term Needs
Because term life insurance is sold for specific time periods, after which the insurance lapses, it may make sense to combine a shorter-term policy with a higher death benefit and either a longer-term or permanent policy with a lower benefit. You might align the short-term policy’s benefit and term with a specific need, such as paying off your mortgage.
Laddering Term Life Insurance
Another way to cover your family’s short- and long-term financial needs is to purchase multiple term life insurance policies using a strategy called “laddering.” Financial planner and tax professional Sean Mullaney said that “the idea [behind laddering] is if you were to die today, your loved ones would likely need more money from life insurance for the rest of their lives than if you were to die 20 years from now, after you have built up significant assets.”
For example, you might choose to buy three $1 million policies: one with a 10-year term, one with a 20-year term, and one with a 30-year term. If you were to pass away within the first 10 years, your beneficiaries would receive $3 million ($1 million from each of your policies). As you age out of each term life policy, the death benefit your heirs would receive decreases.
If you’re interested in laddering term life insurance policies, Mullaney said that “in many cases, it makes sense to purchase [multiple] life insurance policies at one time.”
Why is that? According to Weiss, “the two key factors here, outside of need, are health and age. The older you get, the more expensive life insurance gets. [And] the healthier you are, the better your rates. A good rule of thumb then is for healthy, young individuals to lock [in] their more expensive policy sooner rather than later.”
Pros and Cons of Getting Multiple Life Insurance Policies
High coverage when you need it, lower coverage when you don’t
May be less expensive
Flexibility to react to life changes
Financial needs may not decrease
May be more expensive
Higher potential for lost policies
- High coverage when you need it, lower coverage when you don’t: Your need for life insurance will generally decrease as you age, according to Weiss. That’s because you are more likely to have increased your assets over time, reducing the amount of money your family will need for future expenses after you pass away. Carrying multiple policies can provide you with the current and future coverage levels you need. You’ll remain covered for the long term, but your death benefit will reflect your current needs. As those needs decrease over time, you allow the shorter-term policies to lapse.
- May be less expensive: Purchasing three policies with lower death benefits may be cheaper than purchasing a single policy with the same total benefit. For example, the three $1 million policies described above with 10-year, 20-year, and 30-year terms may be more affordable than a $3 million, 30-year term policy. You may want to request quotes for both scenarios to see which strategy will be more affordable.
- Flexibility to react to life changes: The ability to purchase additional policies after having more children, getting married, starting a business, or making other major life changes gives you options and flexibility with your life insurance. Adding policies allows you to ensure your family (and/or business partners) will be covered in the event of your death, even as more people become dependent on your income.
- Financial needs may not decrease: The term life insurance laddering strategy is based on the assumption that your family’s financial needs will decrease over time, but this is not necessarily always the case. As Weiss said, “Lifestyle creep is a powerful force that may keep your overall needs high throughout your life.” If you continue to increase your expenses along with your income, it’s less likely that you will be able to grow your assets. That means you’ll leave fewer assets to your family if you pass away, and if you die later in your ladder, the lower death benefit—which seemed reasonable when you planned your ladder—may not be enough to maintain your family’s standard of living.
- May be more expensive: Buying multiple policies at different times means hoping that you maintain your good health. If your health changes between purchases, or you wait a little longer than planned, your age or new health conditions could increase the premiums for the next rung in your insurance ladder.
- Higher potential for lost policies: “Over $1 billion in life insurance payouts goes unclaimed each year,” Elliott said. This is in part because beneficiaries may not even know a policy exists or how to claim it. The more policies you have, the higher the likelihood that one will be forgotten—so if you do go this route, make sure to keep detailed, organized records.
The Bottom Line
Carrying multiple life insurance policies can be a savvy way to protect your family as your needs change. Purchasing multiple policies can help you find the right combination of protection at the right price, rather than opting for a high level of coverage beyond the time when your family needs it. But multiple policies are not necessarily the right choice for everyone. Depending on your financial needs and current circumstances, multiple policies may not provide sufficient coverage and may not save you money.
It’s important to think carefully through what you need from life insurance so you can determine whether purchasing multiple policies will meet your requirements.