A life insurance policy is an important component of your financial plans if your death could leave your family with debt, a loss of income or unfunded financial obligations, such as paying the cost of college for children.
But what if you already have coverage, but it isn’t adequate to your needs? Additional coverage, including through new policies, may also make sense when you undergo major life events that change your financial obligations or risks. Those can include getting married and having a child, or additional children.
Or you may simply become aware, life changes or not, that your current coverage isn’t up to your financial needs. This is common for people who have life insurance plans through their employers, as employer plans often don't alone provide enough coverage to cover your financial obligations.
Many people share the worry – often justifiably – that they have less life insurance than they should. According to recent statistics from the research organization LIMRA, 52% of American adults have life insurance, but 41% of all U.S. adults believe their coverage isn’t large enough.
It’s allowed, and legal, to carry multiple life insurance policies, when they’re needed. Read on for advice on if and how you should carry more than one life insurance policy, and how best to do so.
What to consider when buying multiple life insurance policies
Here’s what to weigh if you think you may need additional life coverage, including from buying another policy.
Coverage needs and financial goals
You first need to determine how much life insurance you need, and compare that amount to any coverage you already have. One tool for making this calculation – and one that’s considered the most accurate by some experts – is known as the DIME method.
A DIME analysis rolls together four key measures to help you determine your life insurance needs: your debt, annual salary, mortgage amount and future education costs for your kids. Life insurance seeks to replace those when you die, and perhaps to cover such other obligations as funeral expenses as well. Adding up the costs from your analysis will tell you roughly how much life insurance coverage you need.
Another calculation method to determine how much coverage to buy is to use an income multiplier. While insurance companies have limits, many experts suggest aiming for 10 times your annual income. So if you make $125,000 a year, your recommended death benefit would be $1,250,000.
Affordability of life insurance premiums
Life insurance companies base rates on age, health, plan type and coverage amount. Before purchasing a plan, you can request quotes on the premiums for a life insurance policy.
In addition to the effect of such personal information as your age and health, the cost of a policy will vary a lot based on the type of life insurance you choose. There are three basic types of life insurance, listed in rough order of least to most expensive to buy:
- Term life insurance: The least expensive option, term policies last for a specified period, such as 5 to 30 years. You don't receive a payout if you outlive the policy.
- Whole life insurance: Like other types of permanent life insurance, whole life policies last indefinitely, and are priced higher than term coverage to reflect that longevity. It also builds cash value you can borrow from.
- Universal life: Universal plans are similar to whole life insurance, being another form of permanent insurance. These plans typically have adjustable interest rates, which affect the growth of your cash value.
Health and age
Life insurance plans cost more as you age and when you have health issues. Finding another policy might be challenging as you age or develop health issues. If you need more coverage than you have and can't find another policy, your only option may be to contact your agent to ask if you can increase your current plan.
Overlapping life insurance coverage
Having multiple life insurance policies can be a worthwhile solution when you need more coverage now than you'll need later. For example, you might have both a whole-life policy that lasts until you die and a term-life policy that lasts for the 20 years of your life in which your financial obligations are greatest.
You can also double up term coverage for a certain period by using what’s known as a laddering strategy. This technique involves buying several term life policies with expiration dates that differ. So, for example, you might take out a 20-year policy with a $500,000 payout and add a second $250,000 policy, with a 10-year term, to help cover additional obligations before your children are independent, such as paying for college.
Beneficiaries do not generally pay taxes on life insurance claims they receive. However, life insurance policies can have tax implications for their policyholders. Some types of life insurance, including universal life insurance, pay interest on your policy's cash value. You must report the interest earned on your taxes and pay taxes on it.
If you're concerned about tax implications or other financial risks from expanding your life insurance coverage, consider consulting with a tax accountant, lawyer or life insurance agent for advice.
How to buy additional life insurance policies
If one or both of your calculations of need suggest you are indeed underinsured, it’s time to consider increasing your coverage. You have several options for doing so.
The first is to check with your insurance agent or company about whether you can increase the death benefit on your existing life insurance policy. Some policies have such an option. However, it often must be selected when buying the policy.
There is no limit on the number of life insurance policies you can have. However, life insurance companies have limits on how much total coverage you can carry, from all policies from all insurers. When applying for coverage, you’ll be asked to list details about any current or pending life insurance policies you own. Tell the truth – not least because the company may discover your other policies anyway, during the process of approving your new policy.
Insurance companies typically base the total limit on your income. The coverage limit varies by company, but for younger applicants (say, no older than 40), the limit can run as high as 40 or 45 times annual income – which should allow you ample coverage. Older applicants, by contrast, may be limited to total coverage of 20 or even 10 times annual income, which might yield a ceiling on coverage that’s lower than you may want.
When seeking to purchase a second life insurance policy, you’ll be required to complete an application and disclose not only the other policy or policies you hold, but other data – including details about your health.
Unless you’re buying a no-medical-exam policy, the insurance company will then complete an underwriting process before approving your policy. Many companies use the Medical Information Bureau (MIB), which is a database containing files of people who have filed for life insurance within the last seven years. It contains details about a person's medical records and health issues and can also reveal any current life insurance policies you have. Even with such data, the insurer may still require you to undergo a medical exam.
Tips for managing multiple life insurance policies
Owning multiple life insurance policies requires more attention to detail than having just one plan. Here are a few vital management tips.
Review and update life insurance beneficiaries
Your beneficiaries receive your policy's death benefit, and the people you name as your beneficiaries will be on the policy unless you change it. Review this information annually to ensure the policies correctly reflect the people you want to receive the policy’s proceeds.
Store policy documentation with care
Life insurance providers might not notify your beneficiaries when you die. It's up to you to ensure your designated recipients know you have a policy and that they're the beneficiaries. Keep your policies in a secure place where your family can easily locate them. If you have multiple policies, make sure your family knows about them all.
Evaluate and adjust coverage as needed
As with owning only a single life insurance policy, multiple policies require evaluations from time to time, to ensure they’re still meeting your needs, and not exceeding them at needless expense.
For example, you'll likely want to adjust your policy if you have a child, or get divorced when holding a joint-term life insurance policy with your spouse, since such policies pay out only after both owners die. It's common to need less life insurance as you age. As a result, you might choose to cancel one policy as you get older.
Consolidate life insurance policies when necessary
If you can increase coverage on one of your policies, explore whether you can do so to an extent that you may not need coverage from another policy.. If you can increase your plan enough, you might want to cancel your other plan, which could simplify management of your insurance, for you and (eventually) your beneficiaries.
Summary of Money's advice on multiple life insurance policies
In some circumstances, it's wise to carry multiple life insurance policies. Those situations include an evolution in your insurance needs, perhaps in response to such life changes as getting married or having a child.
Among the strategies for owning multiple policies is that of “laddering” several term policies – as in, buying them so that they expire at different times – in order to be protected, but not overly protected, during a period during which your insurance requirements will vary.
Before buying an additional policy, check if you can expand your existing one to accommodate your needs. If you can, research the costs and other implications of doing so, and compare those to the pros and cons of acquiring a new policy.
Keep in mind, though, that in seeking to take out additional coverage (whether with existing or new policies) you may run up against limits on the total life insurance benefits you can carry across the various policies you hold. The older you are, the more likely that will be the case.
Confused about what type of coverage you should buy? Reading about life insurance for beginners may get you on the track. And once you're ready to buy, consult our picks for help in selecting the best life insurance companies for your needs.