When Should You Carry Multiple Policies?
Up until the late 1970s, you could buy life insurance policies from kiosks at airports. You were essentially buying a term life policy that lasted as long as your trip. Whether you already had life insurance didn’t matter. Today, air travel is far safer and those kiosks are long forgotten, but you may have many reasons for having multiple life insurance policies, either term life, whole life, or both.
The most common question people ask about multiple life policies is whether it’s legal. Insurance companies love having as many customers as possible, and while insurance is heavily regulated, it’s perfectly legal to own more than one life insurance policy. Indeed, you may find many situations where having multiple policies makes good financial sense.
Life insurance is a wonderful tool that spares your loved ones some of the pain of losing your income and support. But as with many insurance matters, the terminology can be confusing to many people. Complicating matters, life insurance comes in two basic forms that have many different names and different degrees of coverage. The question most people ask is whether they need term life or whole life. Once you get around the confusing terms and understand important differences, term life and whole life are easier to grasp.
The most basic definitions are the simplest: term life lasts for a specified term of your life; whole life lasts for the rest of your life. In both policies, your beneficiaries receive your death benefit when you die. The main differences lie in the duration of the two forms of life insurance and some of the built-in features available.
Owning Multiple Term Life or Whole Life Policies Often Makes Sense
Term life covers you for a limited time—the life of the policy. The term of a term life policy could be anywhere from one month to 30 years. That’s about all term life does—pay a death benefit when you die. You have to work out the terms of the policy.
But term life is generally aimed at younger consumers, and often those customers outgrow their term life policies. If you buy a policy at 25 and name your mom and your spouse as beneficiaries, you can later change the policy to include future children, but the overall terms will remain the same—your designated beneficiaries would end up with fewer benefits from your life insurance policy. Consequently, some term life policies allow you to switch to whole life down the road.
Term life comes in two basic forms: level term life and decreasing term life. By far, level term life is more popular because the death benefit stays the same throughout the policy’s time frame. In decreasing term life policies, the benefit decreases over the course of the policy, most commonly in one-year increments. According to the Insurance Information Institute, a whopping 97% of term life policies sold in 2003 were level term policies.[i]
As with most insurance policies, the premiums you pay are not refunded if you make no claim during the course of the policy. But some insurance providers now offer return of premium term life policies. You would pay higher premiums, but when the policy expires and you’re still on this side of the grass, you get part or all of your premium back. Some return of premium term policies give you all of your premiums back while others return just the base premium.
To avoid those complications, many people simply buy a whole life policy while the term life policy is still in effect. You can increase the amount of insurance you need without short-changing your beneficiaries. And in cases like this, holding multiple policies costs far less than canceling one policy to merely replace it with another one that is often more expensive.
Major life changes is one reason to carry multiple life insurance policies at one time. Another reason is that term life is generally much less expensive than whole life. According to the Wall Street Journal, a 20-year $500,000 term life policy for a healthy 45-year-old man costs about $600 a year while a similar whole life policy costs more than $3,000.
Whole Life Offers Safe Investment Opportunities
Also known as permanent life insurance, whole life policies pay out death benefits if you die tomorrow or in 2099. Whole life also allows you to build equity in the form of a savings account. This is where it gets a little complicated (the insurance part, not the living until 2099 part). Whole life insurance is available is three types of policies, each with their own variations.
In a traditional whole life policy, premiums and benefits stay the same for the life of the policy, which has both advantages and disadvantages. On one hand, you can buy a whole life policy in middle age and your survivors will still enjoy the benefits. But if you buy a whole life policy in your early 20s and live another 80 years, the overall cost of your whole life policy will be very high.
In these cases, you are essentially overpaying for your insurance. This is why whole life insurance policies are regulated. You can option out of the policy at any time for the policy’s cash value. If you pay your premiums regularly, the insurance company pays you dividends in the form of a savings account.
Universal life policies are a more recent innovation. Also called adjustable life policies, these popular whole life policies allow you to increase the death benefit if you pass a physical exam. You also earn money at market interest rates in a cash value account. Later, you can change the premium rate with the funds in the cash value account.
Variable life policies are similar to universal policies but riskier because instead of merely being tied to interest rates, you can invest your savings account in the stock market. Your death benefits with this kind of policy go up or down, depending on how your investments perform. Finally, variable-universal life policies combine features of both, allowing you to get a better death benefit while adjusting your premiums.
Whole Life or Term Life? When Are Multiple Policies the Best Solution
Having multiple life policies offers consumers more flexibility and more opportunities to save on overall costs. This is possible because multiple policies don’t cancel each other out. Rather, they work together to better meet your individual needs. Life insurance is available is so many forms that it can fit your current financial situation and whatever your situation may be in the future.
If you aren’t sure what you will need down the line—and who does?—you can buy a term policy now and a whole life with universal or variable options in the future. You’ll get tax-deferred savings that you can use for premiums, investments, or emergency living expenses. You can even borrow funds from some whole life policies, using the death benefits as collateral.
Talking to a qualified insurance professional is the best way to determine which kind of life insurance policy is best for you.
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derivative of "LIFE" by Will Folsom, on Flickr, is licensed under CC BY 2.0