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As your financial needs change and grow, you may need several life insurance policies to achieve an adequate level of coverage. One policy may not be enough. This can be especially true for high net worth individuals who have complex financial circumstances. In addition, different policies will meet different coverage needs, from estate planning to succession planning to paying for your kids’ education.
But there can be limits on the total amount of coverage you can qualify for and special considerations to take into account when applying for extra coverage. So before you search for another policy, here are a few things to keep in mind when buying more than one life insurance policy.
Related: Compare Quotes from Top-rated Life Insurance Companies with Policygenius
Can You Have More Than One Life Insurance Policy?
It’s possible to have more than one life insurance policy. In fact, there are many good reasons for buying additional life insurance. Here are some of the top strategies.
Supplementing an Employer’s Life Insurance Plan
If you rely solely on the group life insurance from your employer, you may be woefully underinsured. In addition, workplace life insurance coverage limits are usually low, such as low multiples of your annual salary.
“Group life insurance plans offered through an employer are typically limited and are not portable (meaning if they leave their employer, they can’t take a policy with them). For this reason, some people buy individual policies to supplement their life insurance coverage to meet their coverage needs better,” says Tim Heslin, president of AIG Life U.S.
Laddering Life Insurance Needs
Instead of purchasing one large life insurance policy covering all of your projected needs, you can break each coverage need into separate policies. This type of strategy is known as laddering life insurance.
For example, if you have young kids, you might purchase a 20-year term life insurance policy that’s designed to provide coverage for their education costs if you die unexpectedly, a 30-year term life policy to cover the duration of your mortgage and a permanent life insurance policy to cover any final expenses such as a funeral.
The advantage of laddering life insurance is that it is often more affordable to structure your coverage in this way, says Heslin.
Diversifying Your Life Insurance Products
“Because there is a huge variety of life insurance products on the market with various investment options and risk profiles, some policyholders want to spread out their capital, which can reduce their risk. In other words, some policyholders may not want to put all of their eggs in one basket by only funding one insurance policy,” says Caroline Brooks, assistant vice president and counsel, head of advanced markets at John Hancock Insurance.
You may also want to diversify your life insurance purchases in order to achieve different financial goals. For example, suppose you would like a lower-cost protection policy for income replacement but desire a secondary policy for legacy planning or cash value accumulation. In this case, you may want a combination of term and permanent policies, says Brooks.
Meeting Long-term Care Needs
Many permanent life insurance policies give policyholders the option to add a long-term care rider to their coverage. Adding a long-term care rider provides a pool of money to cover long-term care costs later in life.
While you may want to buy a term life policy to cover more immediate needs, purchasing a permanent policy with this option can help you pay for long-term care costs in the future, says Heslin.
Adapting to Changing Life Insurance Needs
When your initial financial needs change, you might need to purchase extra coverage to support a new financial situation. For example, some people buy a life insurance policy when they first get married. When they start having children, their financial needs may change, requiring additional coverage.
How Many Life Insurance Policies Can You Buy?
While there are no limits on the number of life insurance policies you can have, there are generally restrictions on the total amount of coverage you can carry.
“The amount of life insurance available to an individual is determined by their age and average annual income before taxes. Life insurance providers rely on ‘income multipliers’ to calculate these coverage limits, which can vary from carrier to carrier,” explains Cliff Pendell, vice president of marketing and operations at JRC Insurance Group.
Pendall says typical income multipliers fall somewhere in these ranges:
- Age 40 and under: 30 to 35 times your annual income
- Ages 41 to 50: 20 to 25 times your annual income
- Ages 50 to 60: 15 to 20 times your annual income
- Ages 61 to 70: 10 to 15 times your annual income
- Age 71 and over: Up to 5 times your annual income
No one wants to buy (or sell someone) too much insurance—which they may not be able to afford anyway—resulting in a coverage lapse that leaves them without any coverage. So it’s essential to ensure the size of the policy is appropriate for the individual’s financial circumstances, says Heslin.
For example, someone in their 30s with a growing salary may have coverage limited to 20 to 35 times salary. On the other hand, someone about to retire who doesn’t have any income growth potential may have coverage limited to 10 to 20 times their salary.
Keep in mind, income is only one factor underwriters consider when assessing coverage eligibility. Underwriters also take into account other information including your age, assets, debt, health and what existing coverage you already have in place, says Brooks.
Considerations When Buying Extra Life Insurance
If you think multiple policies make sense for your unique circumstances, there are a few things to keep in mind during the application process:
1. You Must Divulge Any Active Policies
When you apply for a new life insurance policy, you’re required to disclose any policies you currently have in place. To check if all current policy information is correct on your application, insurance companies will review the database of the MIB Group. This organization gathers data on applications for individual life insurance (and other types).
“Insurers inquire about existing coverage to ensure a policyholder has the appropriate amount of insurance and it falls within the income ratios set by the insurance carrier. So, for example, if the insurer’s ratio says that the policyholder can qualify for up to $1.5 million of coverage, but they already have a $500,000 life insurance policy in place, they may now only qualify for an additional $1 million policy,” says Heslin.
2. You May Need to Complete a Financial Verification of Your Assets
Depending on the amount of coverage you apply for, you may need to provide additional documentation. Insurers generally require financial verification for a policy of $5 million or more to confirm your insurance and lifestyle justify a specific amount of coverage. In some cases, you may need to provide tax documents even if you’re not applying for multi-million-dollar life insurance policies.
3. You May Need to Buy Several Insurance Policies
Some insurance companies put $5 million to $10 million limits on individual policies. These limits help insurers mitigate risk. If you’re looking for a substantial amount of coverage that exceeds a certain company’s limits, you may have to purchase multiple policies from different insurers.
On the other hand, many insurers partner with reinsurance companies, which allows them to offer larger life insurance policies, generally up to $65 million of coverage to meet the needs of high-net-worth individuals—sometimes even more. Remember, though, every life insurance company will have limits specific to their underwriting requirements and customer risk profile.
4. You May Have to Complete Extra Medical Tests or Requirements
As part of the life insurance application process, you often must complete a life insurance medical exam. If you apply for coverage exceeding $5 million, some insurers may require additional testing such as an electrocardiogram (EKG) and a simple heart evaluation.
5. Know What You’re Trying to Protect Against
The bottom line is: What potential problem are you trying to solve? Selecting the right type and amount of coverage for complex situations is often an art that requires the knowledge and expertise of professionals. It’s 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 evolve, it is wise to regularly assess your coverage to determine if you need to make adjustments.
Ashley Kilroy is a personal finance writer and content creator. In addition to being a contributing writer at Forbes, she writes for solo entrepreneurs as well as for Fortune 500 companies.