Introduction
Life insurance is commonly considered a one and a single long term financial choice, something that is bought once in life and is kept over the decades. Nevertheless, with the changing personal condition and financial liabilities, long-term objectives, your life insurance policy configuration might also require some adjustments.
Having multiple policies simultaneously is one of the strategies that are investigated by many people. Although the idea of this approach might not be necessary at a glance, one can find some valid reasons as to why an individual can benefit with such layered coverage.
Making decisions about your own financial protection plan could be more informed based on the concept of understanding how and why humans make the decision of taking multiple life insurance policies. The present article discusses this concept in detail, describing the reasons, benefits, possible limitations, and major considerations that can be made.
What Does It Mean to Have Multiple Life Insurance Policies?
The fact that a person has over one policy of life insurance only implies that he or she has two or more policies in operation at the same time. These policies can either be given by the same company that provided the insurance or they can be provided by other companies.
The form may be of different types: there are those who mix term policy with varying durations of the cover, and others who mix term policy with a permanent cover like whole life insurance or universal life insurance. The need to have more than one life insurance policy is usually as a result of shifting in life. An example is that a person can start a 20 year term policy to cover young children and add another policy to cover a mortgage or business commitment.
The new policy does not substitute the original cover; it only supplements it. The policies are independent and each has its premium payments, terms, and insured persons (but the insured persons may overlap). Beneficiaries are usually paid out by all policies when a claim is made under the condition that terms and conditions are taken into consideration.
Why People Choose More Than One Policy
The practical reasons why the layered life insurance coverage is taken by persons are several.
Changing Financial Responsibilities
Financial obligations can hardly rest. Financial responsibilities can be a big burden especially because of marriage, having a child, buying a house and even business ventures. Rather than a replacement of an existing policy which can come with an increase in premiums in relation to age, the addition of a second policy can be more effective.
Locking in Lower Premiums Early
You receive better premiums when you are younger and healthier. There are also those people who buy a base cover in their early adulthood and add to it later as they increase their income. In this plan, they can fix good rates on a certain part of their cover.
Coverage for Specific Needs
Some of the policies are specific to specific financial objectives. An example is that one of the policies can include income replacement, whereas another can include estate planning or final expenses. Financial planning can be more accurate by dividing coverage on the purpose.
Layering Coverage for Different Life Stages
One of them is called laddering or layering life insurance. In this strategy, one would buy several term policies that have varying terms and cover.
For instance:
- Long-term family protection can be done under a 30-year term policy.
- A mortgage can be combined with a 20-year policy.
- A policy of 10 years can help children up to the period of their adult age.
With the reduction in shorter-term obligations, the older policies expire, which is replaced only by the longer ones. This type of structure may be more affordable than buying a single large policy that will cover the full requirement of the whole duration.
Layering can be used to cover in a manner that is close to the estimated financial demands as opposed to risking to pay more to get an insurance that may not be required in the future.
Combining Term and Permanent Insurance
The other reason that makes people have more than a single policy is to have a combination of the types of cover.
Term Insurance
Term life insurance is a cover that lasts a given time which may be 10, 20 or 30 years. It is less expensive and is commonly employed as a replacement of income or as a guarantee against debt.
Permanent Insurance
Whole or universal life insurance is permanent life insurance that provides lifetime coverage and can build cash value during the lifetime. It is commonly applied in estate planning, transfer of wealth or long term financial planning.
Keeping the two types, a person will have the opportunity to meet the short-term needs of the term insurance and have long-term planning goals covered by permanent insurance.
Potential Advantages of Holding Multiple Policies
Carrying a multiple life insurance policy could have a number of advantages:
Flexibility
Numerous policies offer the flexibility of changing the coverage according to the course of life. In case there is a shift in circumstances, any of the policies can be called off or simply allowed to lapse without interference of others.
Risk Diversification
Diversifying among insurers can help lessen the reliance on one company, but trusted insurers are typically not financially challenged.
Tailored Financial Planning
The distinct separation of policies based on purpose, like debt coverage, income replacement or estate planning, may provide a better financial system to beneficiaries.
Cost Management
Different policies may at times be cheaper than buying a single policy that covers the entire period of all the financial liabilities.
Important Considerations and Potential Drawbacks
Although there are advantages, having a number of policies is not necessarily the most optimal option to every individual.
Higher Administrative Complexity
Handling a number of policies implies the need to monitor a number of premium payments, renewal dates and policy documents. Failure to adhere to a payment would put coverage at risk.
Total Coverage Limits
The insurance companies evaluate your general coverage as compared to your income and financial requirement. There can be a need to underwrite and justify the medical and financial need to apply to additional policies.
Cumulative Premium Costs
Even though layering may be economical, there may be several policies whose premiums become cumulative. There should be an effort to make the total premium obligations sustainable.
Beneficiary Coordination
When various beneficiaries are assigned under various policies, one should pay close attention so that the payouts would meet your estate planning objectives.
Conclusion
Life insurance planning is a decision that is seldom made once. With increased and redistributed financial obligations, so can your coverage requirements. Several life insurance policies can also be used to give flexibility, flexibility to have coverage in accordance with particular obligations and a tactical method of dealing with the long-term financial coverage.
Nonetheless, this method is not a simple affair that needs to be carefully planned, analyzed concerning premium obligations, and long-term objectives. It is prudent to review your general financial position and maintain the level of cover on policies that are satisfactory and sustainable before making additional or changes to them.
Finally, the rationality of a single policy or several policies will depend on your own situation, financial goals and the degree to which you are comfortable handling multiple coverage agreements. The process of making an informed decision starts by getting the options- and their fit into your larger financial plan.
