Can you have multiple life insurance policies?

February 26, 2021

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Your life insurance needs change as you age — and having children, getting married, divorced, or retiring can also have an impact on the coverage you require. Some people start off with a simple term life policy in their 20s and then expand their coverage as they start families and businesses. 

Therefore, it's common to end up with multiple life insurance policies and some overlapping coverage. In fact, some financial advisors even recommend a combination of term life and permanent life insurance policies for maximum coverage.

That said, you'll want to avoid applying for multiple insurance policies at the same time. Otherwise, insurance companies may think you are committing fraud to get more coverage than you qualify for. This is the benefit of having an insurance specialist or financial planner help you go over life insurance options. 

Below are the most common reasons people have multiple life insurance policies.

Most employers offer some sort of group life insurance, usually equal to your salary, for free or at a low cost. One disadvantage of employer-provided group life insurance is that if you leave your job — resign, retire, or are terminated —  you lose coverage. 

Another disadvantage is that it may leave you underinsured. Half of Americans who have life insurance are underinsured, meaning their death benefit would not cover expenses like mortgage, college, food, debts, and clothing for dependents.

Typically, group life insurance won't allow you to get 10 times your income. That's why it is recommended that you have a personal individual life insurance policy outside of your work group life insurance. Many people may start off with a group life plan and then get an individual policy that offers a larger death benefit. 

If you purchased life insurance while you were single, you probably selected a lower death benefit because it was affordable. But if you now have dependents or a partner and a mortgage, you will want a larger death benefit to take care of your family and cover expenses like the mortgage and college if you die.

If you have a term life policy that you've been paying on for years, unless you have a "return of premium" rider, you do not get any of that money back. So if the policy is still affordable, most people just get a new policy with a larger death benefit. The overlapping coverage will be welcomed should tragedy happen.

If you have certain health issues, you may not qualify for traditional life insurance, because traditional life insurance policies require underwriting that includes a medical exam. However, no medical exam life insurance is an option. It typically has a low death benefit amount, known as final expense insurance or funeral insurance.

Individuals with health concerns or recent nonsmokers may have annual renewable term policies until they qualify for cheaper rates from a traditional life insurance policy. There may be overlap between the annual renewal term policy and when coverage for a traditional life insurance policy starts.

If you want to build wealth, there are life insurance products to help you do just that. Although most people probably have term life insurance, permanent life insurance products — like whole life, universal life, and variable life — never expire and have a cash value component that you can use during your lifetime.

It's wise to consult a financial advisor, accountant, and estate planning attorney to make sure you have the proper insurance coverage you need for your goals and budget. They will provide a comprehensive assessment that includes whether you need long-term care life insurance, disability insurance, and a combination of permanent and term life insurance

A combination of term life and permanent life insurance offers maximum coverage because at some point term life insurance expires, but your permanent life insurance lasts for your lifetime. 

"A financial plan is built on a strong foundation of life insurance and risk management holding everything up — premature death, and loss of income due to illness or disability," said Silvia Tergas, a financial planner with Prudential. 

Ask yourself where you're going to be in 5, 10, and 35 years. Tergas said this exercise requires an understanding that the decisions you make today will impact you down the road. Planning for retirement should start when you're young and healthy.

Your life insurance should complement your other retirement planning accounts like 401(k)s and IRAs. Those who start planning for retirement later in life may already have a life insurance policy, but not one that helps them in retirement.

"A prenuptial agreement is like a life insurance policy in itself  — you don't need it until you need it," said divorce lawyer Kimberly A. Cook, principal mediator at Dovetail Conflict Resolution. She noted life insurance in the early stage of premarital planning offers some level of protection.

Cook said cash value life insurance policies (permanent life insurance) are counted as an asset for financial disclosures and property allocation for spousal and child support during divorce proceedings. She noted that in certain states life insurance is actually required as security for child support or spousal support.

You may already have life insurance, but a divorce decree may require separate life insurance as a guarantee for child support and alimony payments, in which case you'd end up with multiple policies.

If a person has substantial private student loans or private debt, life insurance is often used to wipe the slate clean for the surviving business partner, spouse, or estate. Some lenders may require separate life insurance to secure your business or personal loan. This will cause you to have multiple policies.

Decreasing term life insurance policies are connected to a mortgage, business loan, or personal loan. The amount of the death benefit is equal to the mortgage or loan, with the length equal to the timeframe of the debt. If you die, it pays off the remaining debt.

Ronda Lee is an associate editor for insurance at Personal Finance Insider covering life, auto, homeowners, and renters insurance for consumers. She is also a licensed attorney who practiced litigation and insurance defense.