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As your financial needs change and increase, you may need more than one life insurance policy to achieve an adequate level of coverage. One policy may not be enough. This can be especially true for wealthy people who have a complex financial situation. Plus, different policies will meet different coverage needs, from estate planning and estate planning to paying for your children’s education.
But there may be limits on the total amount of coverage you may be eligible for and special considerations to take into account when applying for additional coverage. So, before you look for another policy, here are a few things to keep in mind when buying more than one life insurance policy.
Can you have more than one life insurance policy?
It is possible to have multiple life insurance policies. In fact, there are many good reasons to purchase supplemental life insurance. Here are some of the best strategies.
Completing an employer’s life insurance plan
If you rely solely on group life insurance from your employer, you could be woefully underinsured. In addition, the limits of work life insurance coverage are generally low, such as low multiples of your annual salary.
“Group life insurance plans offered through an employer are generally limited and not transferable (meaning that if they leave their employer, they cannot take a policy with them). For this reason, some people purchase individual policies to supplement their life insurance coverage to better meet their coverage needs, ”said Tim Heslin, president of AIG Life US.
Life insurance needs scale
Instead of purchasing a single life insurance policy covering all of your projected needs, you can divide each coverage need into separate policies. This type of strategy is known as structured life insurance.
For example, if you have young children, you could purchase a 20-year term life insurance policy designed to cover their education costs in the event of an unexpected death, a 30-year term life insurance policy for cover the term of your mortgage and a permanent life insurance policy to cover final expenses such as a funeral.
The advantage of structured life insurance is that it’s often more affordable to structure your coverage this way, says Heslin.
Diversify your life insurance products
“Since there is a wide variety of life insurance products on the market with various investment options and risk profiles, some policyholders want to spread their capital, which can reduce their risk. In other words, some policyholders may not want to put all their eggs in one basket by funding just one insurance policy, ”says Caroline Brooks, Assistant Vice President and Advisor, Head of Advanced Markets at John Hancock Insurance.
You may also want to diversify your life insurance purchases in order to meet different financial goals. For example, suppose you want a lower cost protection policy for income replacement, but you want a secondary policy for wealth planning or cash value accumulation. In that case, you might want a combination of temporary and permanent policies, explains Brooks.
Meeting long-term care needs
Many permanent life insurance policies offer policyholders the option of adding a long term care rider to their coverage. The addition of a long-term care rider provides a reserve of money to cover the costs of long-term care later in life.
While you may want to purchase a term life insurance policy to cover more immediate needs, purchasing a permanent policy with this option can help pay for long term care costs in the future. , explains Heslin.
Adapt to changing life insurance needs
When your initial financial needs change, you may need to purchase additional coverage to deal with a new financial situation. For example, some people buy a life insurance policy when they get married for the first time. When they start having children, their financial needs may change, requiring additional coverage.
How many life insurance policies can you buy?
While there is no limit to the number of life insurance policies you can purchase, there are generally restrictions to the total amount of coverage you can purchase.
“The amount of life insurance available to an individual is determined by their age and average annual income before tax. Life insurance providers rely on ‘income multipliers’ to calculate these coverage limits, which can vary from insurer to insurer, ”says Cliff Pendell, vice president of marketing and operations at JRC Insurance Group.
Pendall says typical income multipliers fall somewhere in these ranges:
- 40 and under: 30 to 35 times your annual income
- 41 to 50 years: 20 to 25 times your annual income
- 50 to 60 years: 15 to 20 times your annual income
- 61 to 70 years old: 10 to 15 times your annual income
- 71 years and over: Up to 5 times your annual income
No one wants to buy (or sell someone) too much insurance – which they might not be able to afford anyway – resulting in a lapse in coverage that leaves them with no coverage at all. . So making sure the font size is appropriate for an individual’s financial situation is critical, says Heslin.
For example, a person in their thirties with an increasing salary may have coverage limited to 20 to 35 times the salary. On the other hand, a person on the verge of retirement who has no potential for income growth may have coverage limited to 10 to 20 times their salary.
Keep in mind that income is only one factor that underwriters take into account when assessing eligibility for coverage. Insurers also take other information into account, including your age, assets, debts, health, and the existing coverage you already have in place, Brooks explains.
Considerations When Buying Supplemental Life Insurance
If you feel that several policies are appropriate for your particular situation, there are a few things to keep in mind during the application process:
1. You must disclose all active policies
When you apply for a new life insurance policy, you are required to disclose any policies that you currently have in place. To verify if all current policy information is correct on your application, insurance companies will examine the MIB Group database. This organization collects data on individual life insurance claims (and other types).
“Insurers find out about existing coverage to ensure that a policyholder has the correct amount of insurance and meets the income ratios set by the insurance company. So, for example, if the insurer’s ratio indicates that the policyholder may be eligible for coverage of up to $ 1.5 million, but already has a life insurance policy of $ 1.5 million. With $ 500,000 in place, he may now only be eligible for an additional $ 1 million policy, ”Heslin explains. .
2. You may need to perform a financial audit of your assets
Depending on the amount of coverage you are requesting, you may need to provide additional documents. Insurers typically require a financial audit for a policy of $ 5 million or more to confirm that your insurance and lifestyle warrants a specific amount of coverage. In some cases, you may be required to provide tax documents even if you do not purchase multi-million dollar life insurance policies.
3. You may need to purchase multiple insurance policies
Some insurance companies set limits of $ 5 million to $ 10 million for individual policies. These limits help insurers mitigate risk. If you are looking for a substantial amount of coverage that exceeds a certain company’s limits, you may need to purchase multiple policies with different insurers.
On the other hand, many insurers partner with reinsurance companies, which allows them to offer larger life insurance policies, typically up to $ 65 million in coverage to meet individual needs. wealthy, sometimes even more. Remember, however, that each life insurance company will have limits specific to their underwriting requirements and client risk profile.
4. You may need to perform additional tests or medical requirements
As part of the life insurance application process, you often need to pass a life insurance medical exam. If you are requesting coverage over $ 5 million, some insurers may require additional tests such as an electrocardiogram (ECG) and a simple heart assessment.
5. Know what you are trying to protect yourself from
The bottom line is, what potential problem are you trying to solve? Choosing the right type and amount of coverage for complex situations is often an art that requires the knowledge and expertise of professionals. It is extremely important to work with an insurance professional or financial advisor who can help you determine which products best meet your coverage needs, risk profile and budget.
Because life and finances change, it’s wise to regularly assess your coverage to determine if you need to make any adjustments.
Ashley Kilroy is a personal finance writer and content creator. In addition to being a writer at Forbes, she writes for solo entrepreneurs as well as Fortune 500 companies.