Life insurance is one of the best ways you can protect your loved ones by ensuring their financial security in the event of your death. But life insurance can be a tricky endeavor for many. What type of life insurance should you buy, and can you hold more than one policy? If you’re looking to buy your first — or your next — life insurance policy but aren’t sure what’s right for you, we’ve got you covered. Keep reading to learn more about life insurance and if holding multiple life insurance policies is possible.
In This Article
Can You Have More Than One Life Insurance Policy
Yes! It’s perfectly legal to hold multiple life insurance policies, and for many people, it makes good financial sense.
What Are the Different Types of Life Insurance?
There are two, main types of life insurance: term and permanent.
Term Life Insurance
Term insurance is the simplest and most straightforward type of life insurance. It pays only if death occurs during the policy’s specified term, which could range between one and 30 years.
There are two types of term insurance policies:
- Level term policies pay the same amount for the whole duration of the term. This is the most common type of life insurance policy.
- Decreasing term policy benefits drop over the course of the policy term, often in one-year increments.
With a term policy, you’ll pay premiums monthly or annually, and your family will be covered for the duration of the term you choose.
Permanent Life Insurance
Permanent life insurance lasts the duration of your life, so the benefit will pay out at any point — even if you live to be 115 years old.
Some permanent life insurance policies have a cash value component, which allows the policy to build cash value over the life of the policy. You can often borrow against the cash value of these policies and repay them just like you would a traditional loan.
There are a few variations of permanent life insurance policies:
- Traditional whole life: Also called ordinary or straight life, traditional whole life insurance is the simplest form of permanent life insurance. You pay a fixed amount, and a guaranteed benefit goes to your beneficiary when you die. Your premium remains the same, even if your insurance company’s costs rise.
- Universal life insurance: These policies are for cash-value life insurance, and they’re flexible, so the death benefit, cash value element, and premiums can change along with your circumstances. You can choose how much of your premium to allocate to death benefits, and how much to put toward the cash value component.
- Variable universal life insurance: This is another type of cash-value life insurance that offers a death benefit, as well as an investment feature. Your premium is flexible, and changes to the premium can be reflected in your coverage amount. You can also use this type of policy to take part in a variety of investment opportunities.
Should You Have More Than One Life Insurance Policy?
If your life circumstances change at any time, holding more than one life insurance may be right for you.
Insurance companies generally don’t restrict how many policies you can purchase, as long as you can justify your coverage needs. You can also buy coverage from multiple life insurance companies, which might help protect you should one of those companies go out of business (it’s unlikely, but technically possible).
If you’re covered by a single, whole life insurance policy, it can be expensive to try to increase your death benefit and complicated to expand your coverage. It could be cheaper and simpler to instead purchase term policies in addition to, or instead of, your permanent policy. For example, if your life circumstances change (e.g., you have children), it is often a good idea to supplement an existing policy with another policy. Here are your options:
Layering Term Policies
For example, if you are married with children and paying off a mortgage, you might consider purchasing three term policies to cover your various needs for the appropriate lengths of time. You could layer policies as follows:
- Policy 1: A 10-year term policy to cover your children until they are adults.
- Policy 2: A 20-year term policy to cover your mortgage.
- Policy 3: A 30-year term policy to supplement your spouse’s income until they retire.
The terms and coverage would vary depending on your financial situation, mortgage, and children’s ages, but the general idea is that you could save money in the long run by only purchasing coverage for the specific periods of life in which you would need it.
For example, if you layered the above policies and successfully paid off your mortgage, you could let Policy 2 expire because you wouldn’t need a death benefit to cover remaining mortgage payments. Your insurance coverage would decrease along with your needs, thereby avoiding costly policy premiums on coverage you don’t need.
Layering Permanent and Term Policies
A permanent life policy can serve as a baseline for your life insurance needs.
You can then add term policies on to your permanent policy to cover your other needs as they arise. For example, you might consider two policies:
- Policy 1: A traditional whole life policy to cover basic life insurance needs, such as providing your spouse with money in their retirement years.
- Policy 2: A term policy to cover the rest of your mortgage and your children’s education.
As you pay off your mortgage and your kids grow up, you could let Policy 2 expire knowing that Policy 1 would cover any remaining expenses, no matter when you die. Layering term policies on top of a permanent policy would help align your coverage with your needs and save you money in the long run.
When Is One Life Insurance Policy a Better Choice?
If your coverage needs are simple and straightforward, you probably don’t need to worry about layering policies. For example, a single person with no children probably wouldn’t be able to justify purchasing multiple life insurance policies. If your coverage needs are that simple, it’s probably best to keep your coverage simple, as well.
What Are the Pros and Cons of Holding Multiple Policies?
If purchasing more than one life insurance policy is the right choice for you, it can come with lots of benefits, including:
- Lower cost: Term life policies typically come with lower premiums and provide coverage only as long as you need it, so you won’t get sucked into paying for it for the rest of your life.
- Temporary coverage: You can buy additional coverage only for when you need it, so when your need for that coverage disappears, so will that monthly premium.
- Specific coverage: Maybe you want to buy additional coverage just to pay off what’s left on your home mortgage upon your death. By layering a mortgage term policy on top of your existing coverage, you can do just that, leaving your other policies’ death benefits available for your family.
For all the potential benefits of purchasing multiple policies, you’ll be facing additional costs:
- Multiple policy charges: Each insurance policy has a fixed policy charge, so if you own more than one policy, you’ll be paying a charge for each of them.
- Higher insurance costs: Generally speaking, the larger your insurance policy is, the lower the cost per thousands of dollars in coverage is. So if you’re purchasing multiple smaller policies, you might be subjected to a higher insurance cost on each than you would be with one large policy — though you might still save money in the long run.
Should I Drop an Additional Life Insurance Policy?
If you want to drop your life insurance policy, you’ll want to consider a few factors before making the final call. Also, make sure not to cancel a policy until you have another in place to meet your needs.
Canceling a Permanent Policy
Choosing to drop a permanent life insurance policy can be complicated, especially if yours has a cash value component. The returns on those policies are generally low, but if you’ve had your policy for long enough to make the returns worth it — anywhere from 10 to 20 years, depending on the policy — you might want to hang on to it, even if you don’t like it.
However, if you’re sure you want to cancel your permanent policy, don’t wait to do so. If you’ve only had it for a couple years and you know you don’t want to keep it, drop it now — you’ll probably do so at a loss, but if the policy isn’t right for you, you shouldn’t continue paying premiums on it. Term premiums are usually cheaper, so if you want cash returns, you can take the premium cost difference and invest it.
Canceling a Term Policy
Term policies have built-in expiration dates, and are usually only renewable until you’re 75 to 85 years old. You won’t likely find yourself in a position to want to cancel a term life insurance policy — you might simply opt not to renew it.
But some term policies give you the option to convert the term coverage to permanent coverage, where you can move the term coverage into a permanent life insurance policy — and maybe even get some of your term premiums returned to you. The cost of converting from term to permanent is often expensive, but might be the best option if your health takes a sharp turn or you start a business and need permanent insurance.
As your life circumstances change, so will your insurance needs. Therefore, owning more than one life insurance policy may be a good financial decision. Many people benefit from layering a permanent life insurance policy with a term one, or purchasing multiple term insurance policies that cover specific needs as they come and go. Remember to regularly evaluate your financial needs and insurance coverage so you can be sure to provide for your loved ones in the event of your death.