Multiple Life Insurance Policies
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UPDATED: Jul 9, 2019
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When it comes to purchasing multiple life insurance policies, the insurance companies are more interested in knowing the total death benefits you will receive, rather than the number of policies you have.
So, the simple answer is yes, you can have multiple life insurance policies, provided of course that there is an insurable interest and your income supports the purchase of the combined death benefit of the policies.
In this post, I will discuss the cases in which it may be a good idea to purchase multiple policies, along with the financial justification for buying more than one life insurance policy.
You Must Have a Financial Reason
Having a sufficient life insurance amount to protect your family should you pass on prematurely is not only an excellent but also a smart strategy. However, having too much will not only raise a red flag to the insurance underwriter, but you may also be denied coverage due to financial underwriting.
While most just think that they can buy as much life insurance as they want as long as they are healthy, this misconception is the furthest thing from the truth. Being healthy is one thing, being able to buy multiple million dollar policies is another.
What Is Financial Underwriting
Financial underwriting is the process the underwriter uses to evaluate the applicant’s income, net worth, debts, and current economic situation. This is done to make sure the amount applied for is reasonable in proportion to the prospect’s financial needs.
In other words, the amount of in-force coverage cannot exceed your economic requirements. For instance, if you make $50,000 per year and have no children or aren’t married, you will not be able to buy multiple $1million coverages. You don’t have the need nor the financial justification for this type of purchase.
The insurance company is also concerned about the affordability aspect of high amount policies because they want to make sure you can pay your monthly premiums so they aren’t wasting their resources (underwriting, stuff, medical nurses, etc.) for no return. Generally speaking, you can get 5 to 35 times your income in death benefit. The younger you are, the more you can qualify for, and the older, the less you will get.
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Cases for Getting Multiple life insurance Policies
There are a few cases in which it would be advisable to get multiple policies. Let’s review a few examples.
1. Ladder Strategy
A ladder strategy is built upon the premise that the younger you are, the higher the amount of life insurance you need, and the older you are, the less you need. For instance, a 30-year old who has started a new job or is in the process of buying a house and raising a family has a higher risk than a 65-year-old who has no mortgage payments; his children are grown up out of his house and do not depend on him financially.
If I would need the highest amount in the next ten years and then slowly as I pay off my debts and my mortgage I will need less, why would I buy three policies for different stages of my life? Not only will I get the best rates now when I’m healthy and young, but I wouldn’t get stuck with one large policy just because I need it now.
For instance, if you are 40 years old and you want to buy a $1 million 30-year term policy, you would be stuck for 30 years with $99.82 per month, or $35,935.20 for 30 years, and you may not need this amount in 30 years.
You could buy three policies:
$500,000 10-year for $22.40 per month or $2,688 total
$300,000 20-year for $22.14 per month or $5,313.60 total
$200,000 30-year for $34.25 per month or $12,330 total
So your total $1 million policy is spread out and will cost you $20,331.60 instead of $35,935.20 for 30 years. Your monthly payment would be $78.79, and it will be reduced every ten years when you let one policy go.
2. Supplementing Whole Life Policy
For some people, whole life is the way to go. They like the fact that they can build cash value and also that they don’t need to worry that they will outlive a term policy. The problem is that a whole life policy is more expensive when compared to a term policy. They will buy a small whole policy and a larger additional term policy to cover the most considerable debts like mortgage or income replacement should they pass away unexpectedly.
3. Different Needs Call for Different Policies
Not all life insurance policies are created equal and not all are meant to serve the same purpose. Some policies, for instance, would pay the death benefit to a bank or a business, but not to your immediate family members.
You may buy a mortgage term life insurance which will only cover the remaining mortgage balance should you die unexpectedly, but the mortgage bank is the policy’s beneficiary, not your immediate family.
Paying off the mortgage may be a good idea, but your family may have chosen to pay school tuition or medical bills if it was up to them. At this point, you may consider supplementing your mortgage life insurance with another term policy that intends to be income protection, with your family as the beneficiary.
4. Applying to One Policy Until the Other Gets Issued
This is a well-known strategy for the procrastinators among us. It is a known fact the no-exam policy is faster to get issued but is more expensive than the traditional full exam policy. A conventional policy can take anywhere from 2–8 weeks to get issued, depending on the medical conditions and how soon you complete the exam.
So who would do this? A very simple example is a judge telling a husband he must have an insurance policy as part of a divorce settlement. The husband waits until his attorney reminds him that he needs to show up next week with the life insurance policy. The only way for him to get a policy in time will be a no-exam one, while he also applies for a traditional one. Once the traditional one gets issued, he can cancel the first one he bought.
5. Diversify in Case One Company Goes Bankrupt
This isn’t a good reason to buy a policy from multiple companies. It is highly unlikely because the life insurance business is heavily regulated by the state in which it is sold. Also, many times there are life insurance takeovers when the life insurance company is troubled, and that company will assume the risks for policies that are already in force. If you are still worried, stay with A-rated companies.
There is another case which we see clients buying multiple policies, and it’s when the need arises. When they have another child, buy a second home, etc. This isn’t the best strategy since the older you are, the more you will pay and also the higher chances that your health is not optimal, so you risk paying more because of a new pre-existing condition, or even getting denied altogether for a policy.