Can You Have Multiple Life Insurance Policies?
Stacking life insurance policies can be a strategic move to address financial obligations throughout different life stages. While it’s possible to own multiple policies, insurers typically set limits on the total coverage you can purchase.
Understanding Life Insurance Limits
Life insurance primarily aims to replace your income upon your death. Therefore, insurers often cap coverage based on your income, usually at 20 to 30 times your annual earnings. This is to prevent beneficiaries from receiving excessive payouts beyond their financial needs.
Why Consider Multiple Policies?
While a single life insurance policy may suffice for many, multiple policies, also known as “laddering”, can be beneficial if you have various coverage goals. Assessing the short-term and long-term financial needs of your beneficiaries is crucial in determining if laddering or a single, larger policy suits your situation better.
Diving Deeper: The Life Insurance Ladder Strategy
The “laddering” strategy involves purchasing multiple term life insurance policies to cover different needs, as term life insurance is generally more affordable than permanent life insurance and allows you to specify the duration of coverage. For example, imagine you’re the primary earner, and you want to safeguard your income, mortgage payments, and your children’s college expenses.
Instead of buying one large policy, you could arrange three term policies with varying lengths and amounts to align with each need:
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10-year, $500,000 term life policy: If you pass away within the first decade, all three policies will pay out, providing your family with a $1 million death benefit to replace your income and clear substantial debts like a mortgage, especially while your children are still at home.
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20-year, $300,000 term life policy: Should you die within the second decade, the initial policy will have expired, but the other two will still be active, leading to a $500,000 payout. This could support college expenses or living costs for dependents who still rely on your income.
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30-year, $200,000 term life policy: If you pass in the third decade, only the final policy remains, guaranteeing your beneficiaries $200,000. By this time, your children might be financially independent, and the smaller payout could cover remaining expenses, such as mortgage payments.
Can Laddering Save You Money?
This laddering strategy can be cost-effective if your coverage needs are unlikely to change over time. For example, according to figures from Quotacy, a life insurance brokerage, a 30-year-old in good health who purchased the above three policies would pay a total of $10,470 in premiums after 30 years. In contrast, if the same person purchased a single 30-year policy with $1 million of coverage, they’d pay $16,260 over 30 years.
However, if your coverage requirements aren’t as clear-cut or predictable, a single policy that you can adjust over time might be more suitable. Many insurers offer the option to decrease coverage and pay less, though there are limitations. You might also be able to increase coverage if your needs grow, but you might need a medical exam or answer health-related questions.
Situations Where Multiple Policies Might Be Beneficial
Here are some typical scenarios where acquiring multiple life insurance policies could make sense:
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Small Business Ownership: Consider one term policy for your family’s needs and a separate policy to cover any business loans or operational costs should you die unexpectedly.
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Final Expenses: A separate burial life insurance coverage can help cover final costs like funeral expenses. These policies are a type of permanent life insurance that pays a small death benefit, regardless of when you die.
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Leaving an Inheritance: If you wish to leave a lump sum to a beneficiary regardless of when you die, you might consider a permanent policy like whole life insurance.
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Supplementing Employer-Sponsored Coverage: A typical group life insurance plan might only offer a death benefit equivalent to one or two years of your salary, potentially insufficient to protect your family if you die early.
Frequently Asked Questions
Is there a limit to how many life insurance policies you can have?
No, but the combined amount of coverage you can have is limited. Since life insurance is meant to replace income, insurers typically don’t approve policies that greatly exceed your financial needs.
What is the life insurance ladder strategy?
This strategy involves buying multiple life insurance policies to match distinct financial obligations. For instance, you could use a 30-year term policy to cover your mortgage, a 20-year policy for your children’s higher education, and a 10-year policy for childcare expenses while your children are young.
Do you need additional life insurance if you have a policy through work?
Employer-provided life insurance provides a good baseline, but it often only offers a death benefit of one or two years of your salary. This might not be enough if you have financial dependents. Additionally, most employer plans aren’t portable, meaning a new individual life insurance policy will mean you keep your coverage even if you change jobs.
