Life Insurance

How Many Life Insurance Policies Are Too Many?


Introduction

There is no hard written rule regarding how many life insurance policies one can own. For instance, an individual may have a term policy to satisfy hefty obligation(s), such as a mortgage and a permanent policy to take care of final expenses.

Therefore, this individual has determined that they have both a temporary and permanent need for insurance.  

Owning more than one policy is more common than you may think. Policy owners should be sure that the policies they currently have in place coincide with their needs. They should also be confident that they can afford to maintain the policies in place. 

Best life insurance, best term insurance, best whole life

Temporary Life Insurance & Permanent Life Insurance Products

Before determining whether your current or proposed life insurance plan makes sense, let’s recap the purpose of each type of life insurance product. 


Term Life Insurance (Temporary Life Products)

As referenced in my previous post, term life insurance policies are crafted to meet temporary needs, such as settling significant debts or obligations like mortgages, car loans, credit card debt, and college tuition. These responsibilities typically resolve over time.

Best term policy

Therefore, these are considered “temporary” needs that a term policy can accommodate. 

The premiums are more affordable because the “risk” that the insurance company absorbs is temporary & limited to a period of time.


Whole Life or UL Insurance (Permanent Life Products)

Permanent Life insurance products are structured to stay in force for the insured’s lifetime. Therefore, these types of policies make more sense for essentially inevitable needs. 

Index universal life policy, IUL policy

However, although permanent life policies are intended to offer lifetime coverage, it is vital to note the items that can interfere with the duration of coverage.

For instance, Index Universal Life policies offer:

  • Flexible premium payments: Allows the pay or to miss premium payments.
  • A cash accumulation value that earns interest: The interest earned is based on the index tracked (crediting methods) & the cash value is initially intended to cover the missed premiums.
  • Cost of insurance (premiums): Increases as the insured ages.

Flexible premiums and poor performance can cause the policy to lapse. Consult with your insurance advisor before you utilize the flexible premium feature.

See below:

  • You’ve taken advantage of the flexible premiums several times and leveraged the cash value in the policy to pay the premiums.
  • The policy ends up not performing as well as the illustrations forecasted.
  • Those two variables continues as years passed. The cost of insurance is now more than what the cash value can support due to missed premiums, poor performance, and increased costs. 

Options in place of multiple life insurance policies

Due to major life events, objectives for life insurance tend to change over time. So keep in mind that the current structure you have in place for life insurance is not written in stone. 

If you are satisfied with one policy but want to purchase more insurance down the road, then adding a rider to the policy could make more sense than a second life insurance policy.

Click here to learn more about life insurance riders.


Items to consider

Once more, determining whether you should maintain or obtain multiple policies boils down to your insurable needs. 

Reviewing the questions below with your agent or broker can help determine whether or not there is a need to maintain or amend your policies or, in some cases, need to purchase more coverage.

  • How long will your policies remain in place? For current policy owners, consider each policy’s remaining term(s). 
    • Have your needs changed? If so, how? 
      Example: You purchased a term policy to pay off your mortgage if you unexpectedly passed. Time has passed, and your mortgage is now paid off, but you’d still like a safety net for income replacement set aside for your spouse just in case.
  • Does each policy accommodate what you’re looking to accomplish?
  • Can one policy accommodate all your objectives?
  • Are there any riders on any policies you own or are being presented? If so, what kind?

Takeaway

Before deciding the following steps, policy owners must always maintain sight of each life insurance policy’s overall purpose. It’s also essential to thoroughly understand each of their policies to ensure the policy will function and remain in place as planned. 


What questions do you have regarding riders, multiple policies, and universal life products?

Let me know in the comments! 


Disclaimer: The opinions expressed in this blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security, investment, or insurance product. It is only intended to provide education about the financial industry. The views reflected in the commentary are subject to change at any time without notice.


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