A lot of people like the one stop shopping concept, especially when it comes to life insurance. They want to work with one company, and cover all of their life insurance needs under a single policy. Sometimes that is the best approach, but there are also times when having multiple life insurance policies – from different companies – is a better approach. There are all kinds of reasons why.
Lower cost, especially with term policies
Many people have a single life insurance policy they took earlier in life, when they were able to obtain lower rates based on a younger age. Typically, this is some form of whole life insurance. Whole life insurance is permanent life insurance, which is to say that both the death benefit and the annual premium remain fixed for life.
But if you need additional life insurance coverage, having a single whole life policy has a couple significant drawbacks:
- If you try to increase your death benefit later on, your premiums will be considerably higher based on the fact that you are now older.
- The need for additional coverage is based on temporary factors that will expire before the life insurance policy does. That means you will be paying higher premiums for whole life well after the fact.
Generally speaking, if you have a whole life insurance policy and need additional coverage, you’ll be better off going with a term life insurance policy. Not only will it cost less in premiums, but you will maintain the coverage only as long as you need to, and not get stuck paying for it for the rest of your life.
Temporary need for additional coverage
Often times the need for additional coverage is temporary. For example, parents need more life insurance coverage when their children are young, and completely dependent upon them. But once the children are grown and emancipated, the need for the additional coverage will disappear.
In this scenario, you could have a whole life insurance policy, that provides for your basic need for life insurance, but add a term policy for the additional coverage while your kids are young.
Let’s say that you have a whole life insurance policy with a death benefit of $100,000. But you have two young children, and determine that you would like an additional $200,000 coverage while they are dependents. If your children are preschool age, you can meet this need with a $200,000, 20 year term policy. Such a policy will provide you with the needed additional death benefit, at least until your children are in their 20s. At that point, they will no longer be dependent upon you for support, and you can allow the term policy to expire.
Specific need for additional coverage
Other times the need for an additional policy is related to a specific need. The best example is a home mortgage. You may decide that you want your mortgage paid off upon your death, and a mortgage term life insurance policy will be the perfect way to do that. Not only will it payoff your mortgage, but it will leave your basic whole life policy proceeds available as a pure death benefit for your survivors.
Once the mortgage is paid for, the need for the additional life insurance will disappear. Once again, a term life insurance policy – with the term set to match the number of years of the mortgage term – will be both more affordable, and more appropriate, for the purpose of paying off the mortgage upon your death.
If you have children and a mortgage, you might have three separate life insurance policies – whole life insurance as a permanent death benefit, a term policy for your children until they reach the age of majority, and a second term policy to payoff your mortgage upon your death.
When your children are grown, and the mortgage is paid, you can let the term policies expire, and stay with your original whole life policy. The term policies will have done the job that you wanted them to do.
Diversification of insurance carriers
Not many people think about this, but there is no FDIC for life insurance companies. Though it doesn’t happen often, if your life insurance company goes out of business, your policy could be in jeopardy. In the rare times when such an event has occurred, the situation is resolved satisfactorily – but it could get messy while you’re waiting for that to happen.
You might think of having multiple life insurance policies as being a form diversification of coverage, in much the same way you diversify your investment holdings. The risk is far lower with insurance companies, but the stakes are high enough that spreading your insurance eggs in two or three baskets might make for better sleeping at night.
A knowledgeable insurance agent can help you make that happen.
