Life insurance needs are not set in stone. Your coverage requirements may change over time, and having one life insurance may not be enough. Two or more policies may give your family the level of financial protection they need.
Having multiple life insurance policies may also make sense if you have various financial obligation needs and want a different policy for each one of them.
Besides ensuring adequate protection, this strategy also saves money, since at given point in time you pay only for the coverage you need.
Can you own more than one life insurance policy?
Yes, you can take out more than one life insurance policy from the same or different insurance carriers. There is no limit as such on how many policies you can buy; you can purchase as many life insurance plans as you need. But keep in mind the insurance companies will likely look at any existing coverage you have to ensure you are not over-insuring yourself.
Buying multiple life insurance policies is referred to as laddering. This strategy involves buying two or more life insurance policies — generally term life insurance policies — to tackle different needs. Each term life policy has a different term length and coverage amount, and together they ensure you have additional protection when you need it most. Most people use term life insurance for laddering, since these policies are 10 to 15 times cheaper than whole life insurance and you can purchase different term lengths.
Owning more than one policy can get complex. We recommend speaking with an advisor before laddering.
Let us look at a real-life example to understand how life insurance laddering works.
Joe, a 32-year-old male, is married with two young children, aged five and three. He has 30 years left on his mortgage repayments and 10 years on education loan repayments. Joe wants life insurance to cover these two debts and provide his spouse with enough funds for the children’s college tuition fees.
Joe has two options. He can take out a large 30-year term life plan to cover all his financial obligations, but this may not be a smart option. As Joe’s coverage needs taper off after the first decade, for the next 20 years he would pay for coverage that is more than what he needs.
The more affordable option is to buy a term life insurance policy for each of his financial needs.
- A 10-year term policy with a death benefit of $100,000 to cover his student loan
- A 20-year term policy with a death benefit of $300,000 to pay for his children’s college
- A 30-year term policy with a death benefit of $600,000 to take care of the mortgage
If Joe dies within the first 10 years, all of his three policies will issue a payout. His family will receive $1 million in total, which Joe reckons is sufficient to pay off his two debts and carry the children through college.
If Joe passes away within the second decade, only the second and third policies will pay out. His family will receive a $900,000 death benefit, which can help pay down unpaid debts and cover college costs.
If Joe passes on within the third decade, only the third policy will be in force. His surviving spouse will receive a $600,000 life insurance benefit. By this time, Joe will likely have paid off his student loan and his children may be financially independent. The smaller payout can adequately cover the balance on the mortgage loan and provide his surviving spouse with a sizeable replacement income.
Life insurance laddering works well when you know how your coverage needs will change over time. However, if your needs are not predictable, it would be better to buy a policy that is adequate for your present situation and then adjust the coverage amount over time. Some life insurance carriers allow policyholders to lower the death benefit within permissible limits. In future, if you require more protection, you can buy additional coverage. But you will likely have to undergo medical underwriting again to do so.
Can you apply for multiple policies through different companies at the same time?
Yes, you can simultaneously submit life insurance applications with different providers. However, this may delay the approval process because life insurers will want to make sure your total coverage does not exceed your insurability limit. Also, you may have to take multiple paramedical examinations.
When is it a good idea to have multiple life insurance policies?
For many people, one life insurance policy is enough. However, there are situations in which buying two or more policies makes more sense.
Here are some common scenarios in which you may be better off having multiple plans instead of just one.
You need more coverage
The most common reason for buying more than one life insurance policy is to increase the coverage amount. For example, the policy you bought when you were single may not be sufficient after you have married, bought a home, and become a parent. In this situation, buying an additional policy to address your new financial needs could make financial sense.
Your group life insurance policy is not big enough
Many Canadian employers offer their workers access to group life insurance, either for free or at subsidized rates. Moreover, you do not have to go through a detailed medical underwriting process to be approved. But despite these benefits, group plans have a few drawbacks, the most notable one being lower coverage amount.
Generally, the coverage amount is one or two times your annual salary, which is not enough if you have dependants. Also, a group life insurance policy is usually not portable, meaning you will lose coverage if you switch jobs. For these reasons, many people choose to supplement their group coverage with a sizeable individual life insurance policy.
You want different policies to cover different goals
The primary reason for buying life insurance is to provide your dependants with a replacement income, but you may also use the coverage to cover your debts, fund your retirement income, secure a business loan, and protect your small business, among other things.
Buying different life insurance policies for different financial needs is referred as laddering. For example, if you have a 20-year mortgage and 10 years left on your education loan repayments, you may buy a 20-year term life plan to cover the home loan and a 10-year term life plan to cover the student loan. Laddering ensures your loved ones will be easily able to pay off your debts if you die and you will not be paying for life insurance coverage after paying off the unpaid debts.
You want both permanent and term life insurance coverage
Buying multiple life insurance is necessary if you want both permanent and term coverage. Let us say you take out a sizeable term life policy to protect your family during the most vulnerable years, that is, until your home loan is paid off and your children become financially independent. Because term life insurance is significantly more affordable than permanent life insurance, it is a more popular option for income replacement.
In addition to a term life plan, you buy a permanent life insurance plan to cover end-of-life medical expenses and funeral expenses and/or to leave an inheritance for your heirs. Since permanent life insurance does not have an expiry date, these policies are an obvious choice when the aim is to ensure your beneficiaries receive the death benefit, regardless of when you die.
Is there a limit to how much coverage you can have?
There is no specific dollar limit to how much life insurance you can buy, but your total coverage amount should be reasonable. When you submit an application for life insurance, the carrier will inquire about your existing coverage and current income. If the total life insurance proceeds would exceed 20-30 times your annual salary, the insurer may well turn down your request. That is because life insurance is designed to ensure your family gets a replacement for your income, not to make your beneficiaries rich. In short, you should not be worth more dead than alive.
All life insurance companies in Canada are part of the Medical Information Bureau (MIB). They are required to share pertinent information about applicants with the MIB. This helps prevent insurance fraud and ensure applicants do not over-insure themselves — that is, buy coverage that is more than they reasonably need.
Is having multiple policies a good option for you?
A one-size-fits-all answer rarely works in life insurance. Whether you need multiple policies depends solely on your situation. Do you have different financial goals that can be best addressed by multiple life insurance policies? Is your existing policy not adequate for your needs? Do you need different types of life insurance policies to meet your varied financial needs?
If you answered yes to any of these, buying multiple life insurance might be the right decision.
Alternatives to buying multiple policies
Like any other financial strategy, buying multiple policies is not advisable for everyone. If you want more life insurance protection and are thinking about getting another policy, it may be worthwhile to consider these alternatives first:
Increase your coverage limit
The simplest way to get more coverage is to increase the death benefit of your current policy. Unless the existing coverage amount is close to your insurability limit or your health has deteriorated severely, your insurer is likely to accept your request. Note that your premium rate will go up based on your new coverage amount, age, and health.
Use life insurance riders
Life insurance riders are add-ons that provide supplemental coverage or benefits not included in your base policy. Common riders include the accelerated death benefit rider, accidental death rider, child term rider, and long-term care rider.
Buying multiple life insurance policies is completely legal and a good option in certain situations. You may want to consider taking out two or more policies if you have multiple financial obligations and each has a different timeframe.
Multiple life insurance policies may also serve you better if you have a low-cost group life plan that is insufficient for your needs, or if you want both term and permanent coverage.
Not sure whether you need multiple policies or a single plan? Speak to a Dundas Life expert. We will assess your financial needs, recommend the best course of action, and get you the lowest rates.