September is Life Insurance Awareness Month. It’s a good time to learn some features of life insurance that you may not be aware of.
For example, one life insurance policy is often considered enough, but that may not always be the case. And it’s often about more than the amount of the death benefit.
Here are some common situations that may call for multiple life insurance policies. Of course, this is a general discussion and isn’t designed to provide specific personal advice. Always seek out professional assistance before determining whether you need an additional policy.
When Would You Purchase Multiple Life Insurance Policies?
Life insurance is designed to provide income to beneficiaries in the event of an insured’s passing. However, a single policy may not be enough to cover all of the surviving family’s needs.
A second life insurance policy is an option for those seeking additional coverage. Paying for multiple policies can be expensive, but the greater protection can be worth the cost. Here are some situations that may call for the purchasing of a second life insurance policy.
The birth of a child, changes in employment, or a new relationship are all examples of life changes we may think of when considering greater coverage. As situations change, so do the monetary needs of those around you. As you get raises, marry, or start a family, your need for life insurance increases. While some find it prudent to purchase policies early on in anticipation of these changes, it is not always possible. A young doctor starting their residency frequently can’t afford the life insurance they will need when they have a family and have income in the mid-six figures. It may make sense to start with however much you can afford and buy an additional policy once your income increases.
Another factor to consider is personal lifestyle changes, especially those that involve your health. If you’ve made healthy changes, then a new policy may cost less than before.1 You can buy one to replace the old policy, but other times it may make sense to keep the policy you have and increase the benefit by buying a second policy.
Age and Asset Accrual
While life insurance needs can increase rapidly early in life as you begin to share finances with a partner or start a family, we find that they frequently decline as you near retirement.
The most frequent use of life insurance is to replace your future earnings and continue to support your family after you are gone. For people in their early career, this could mean 30 or more years of earnings. Life insurance needs decline for those approaching retirement because there are fewer years of income to replace.
In addition, those near retirement have been saving (and, we hope, investing) for decades and can use those resources to provide for their family, reducing the need for life insurance.
This is why we frequently recommend laddering insurance policies. This strategy involves buying multiple insurance policies with different terms. For instance, a parent in their 30s who needs $3,000,000 may not be able to afford a single 30-year policy. Instead, we may recommend splitting that between two policies, such as one 20-year and one 30-year, saving thousands of dollars over the subsequent decades.
Multiple plans often provide better coverage, but you will need to track each policy and its costs. Policies sometimes get misplaced and can be hard to find when the insured dies. According to Consumer Reports, 1 in 600 people are beneficiaries of unclaimed life insurance.2 Be sure to organize the information about your policies clearly and ensure your beneficiaries know where to find it.
Whether you need more than one insurance policy will depend on your unique financial and personal situation. Be sure to reach out to a financial professional before moving forward to determine what coverage is right for you.
Want an unbiased opinion about how much life insurance you need? Schedule a free phone consultation with one of our advisors today.
This content is developed from sources believed to be providing accurate information and is provided at least in part by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. Original content of Practical Financial Planning, Inc. only is copyright © 2021 by Practical Financial Planning, Inc.