Life Insurance Credits: Carryover Limits And Your Options

Life insurance is an important part of financial planning, and it's possible to have more than one life insurance policy. There are no laws or regulations limiting the number of policies an individual can hold. The main consideration is cost – as long as you can afford the premiums and your applications are accepted, you can take out as many policies as you wish.

However, it's important to note that purchasing multiple policies should be a strategic decision and may not be suitable for everyone. Some people may choose to buy a second or third policy to get more coverage or to cover a specific life event, such as paying off a mortgage.

Additionally, having multiple policies can be part of a ladder strategy, where you buy several term life policies with varying term lengths. This approach can result in lower premiums compared to a single high-coverage policy, but it requires complex planning, ideally with the guidance of a licensed financial advisor.

How many life insurance policies can you have?

Technically, there is no limit to the number of life insurance policies you can have. You can own multiple life insurance policies from the same or different companies. However, when you apply for a new policy, insurers will consider any existing coverage to ensure that the new policy won't cause you to exceed your insurability limit. This limit exists because life insurance is designed to replace your income rather than significantly increase your beneficiaries' wealth. The limit is typically set at 20 to 30 times your annual income.

While it is possible to have multiple policies, it may not always be the best option. Before purchasing multiple policies, consider your financial goals and needs, both current and future. Ask yourself if you need more coverage or want coverage for a specific life event. Purchasing multiple policies can be part of a larger financial plan, known as a ladder strategy, which involves buying several term life policies with varying term lengths. This strategy can help you save money on premiums, but it requires careful planning and is best done under the guidance of a licensed financial advisor.

If you are unsure about the number of policies you need, consider consulting a financial professional. They can help you assess your financial situation and determine if multiple policies are right for you.

When is multiple life insurance a good idea?

There are several reasons why purchasing multiple life insurance policies might be a good idea. Here are some scenarios in which having multiple policies can benefit you:

• You need more coverage: If you have a low-cost group life insurance policy through your employer but require more coverage than what their policy can offer, you may want to purchase additional policies to meet your needs. This is the most common reason for buying multiple policies.
• You want coverage for a specific life event: For instance, if you're expanding your family and want extra financial protection for your children until they become adults, you might consider buying a second term life insurance policy that offers protection for 15 to 20 years. Similarly, you may want additional coverage while paying off a mortgage or a small business loan to ensure your debts are covered in case of your untimely death.
• You have a financial strategy: Multiple life insurance policies can be part of a "ladder strategy," where you purchase several term life insurance policies with varying term lengths. Over time, the policies expire at different rates as you pay off debts, and you may be able to pay lower premiums compared to having a single high-coverage policy. This approach typically requires complex planning and is best done under the guidance of a licensed financial advisor.
• You own a small business: You may want a term policy to take care of your family and another to cover business loans or operational costs in the event of your unexpected death.
• You need to cover final expenses: You might consider a separate burial life insurance policy to cover final expenses like funeral costs. These policies are a type of permanent life insurance and pay out a small death benefit regardless of when you die, provided the premiums are paid.
• You want to leave an inheritance: If you want to leave a lump sum to someone regardless of when you die, you could consider buying another permanent policy, such as whole life insurance.
• You have insufficient coverage from your employer: Employer-sponsored life insurance is usually worth one or two years of your salary, which may not be enough if you have financial dependents. Additionally, most employer plans are not portable, meaning you may lose the coverage if you change jobs.

Is it okay to apply to multiple insurers at once?

Applying to multiple insurers at the same time is not recommended by most insurance experts. When you submit a life insurance application, your request gets recorded in the Medical Information Bureau (MIB), which exchanges confidential coded data about your medical history. Multiple applications can make it look like you are applying for more coverage than you need, which could lead to denied coverage.

However, there are no laws, rules, or regulations around the number of life insurance policies an individual can have. So, if you can afford the premiums and your applications are accepted, you can purchase and maintain as many life insurance policies as you wish.

There are several reasons why you may want to consider multiple life insurance policies to extend your coverage. For example, you may want to supplement a permanent policy with a term policy, or you may need additional coverage for a specific life event, such as paying off your mortgage or covering your children until they become adults.

Having multiple life insurance policies can also be part of a larger financial plan, such as a ladder strategy, which involves buying several term life policies with varying term lengths. This approach can help you pay a lower premium than you would with a single high-coverage policy.

What are the alternatives to buying multiple policies?

If you need more coverage and are considering a second policy, there are alternative options to explore.

Firstly, you could raise your coverage limit. This is the easiest way to get more life insurance coverage. However, you may have already maxed out your policy's limit, or raising your limit may increase your premium to an unaffordable level.

Secondly, you could purchase life insurance riders. Riders are add-on coverages that offer financial protection in specific areas and fill gaps in your coverage. Common types of life insurance riders include long-term care riders, accelerated death benefit riders, accidental death riders, and child term riders.

Thirdly, you could consider guaranteed insurability. This allows you to increase coverage in the future to meet your evolving needs.

Finally, you could convert your existing term life insurance policy, or a portion of it, into whole life insurance using the conversion feature.

How do you calculate how much life insurance you need?

There are several ways to calculate how much life insurance you need. The amount of coverage you require depends on many factors, including your age, income, mortgage and other debts, anticipated funeral expenses, and financial goals. Here are some methods to help you estimate your life insurance needs:

The 10 Times Income Rule

This is a commonly suggested rule of thumb, where you multiply your annual income by 10 to get an estimate of the coverage you need. However, this method doesn't take into account your debts, future expenses, or existing assets and can leave you underinsured.

Multiply Income by More/Less than 10

Some sources suggest multiplying your annual income by a number higher or lower than 10. This approach is similar to the previous one but allows for some flexibility. However, it still doesn't provide a comprehensive assessment of your financial situation and anticipated needs.

The Years-Until-Retirement Method

This method involves multiplying your annual salary by the number of years left until your retirement. For example, if you're 40 years old and make $20,000 a year, you would need $500,000 in life insurance coverage to reach the age of 65.

The Standard-of-Living Method

This approach is based on the amount of money your survivors would need to maintain their standard of living if you were to pass away. For individuals aged 41-50, multiply your annual income by 20, and for those aged 51-60, multiply it by 15. This calculation assumes that your survivors can withdraw 5% of the death benefit each year while investing the principal amount.

The DIME Method (Debt, Income, Mortgage, Education)

The DIME method is a more comprehensive approach that considers your outstanding debts (excluding mortgage), income, mortgage, and education expenses. It aims to provide a minimal amount of coverage to cover essential family expenses in the event of an untimely death.

Manual Calculation

You can also calculate your life insurance needs manually by adding up your financial obligations and subtracting your existing assets that can be used toward those obligations. Here are some items to consider:

• Income replacement: Multiply the salary you want to replace by the number of years you want to replace it.
• Mortgage balance: Include this if your family would struggle to pay it off without your income.
• Other large debts: Consider any other significant debts that your loved ones would need to pay off.
• Children's college tuition: Add this if you want to ensure your children can pay for their education.
• Existing life insurance: Subtract any other life insurance policies you already have.
• Savings: Include retirement savings or other funds your family could use to pay expenses.
• Funeral expenses: Add this if you want life insurance to cover end-of-life expenses.

Life Insurance Calculator

Using an online life insurance calculator can be a helpful tool. These calculators take into account various factors, such as your income, debts, future costs, savings, and existing life insurance coverage, to provide you with an estimate of your coverage needs.

Remember, it's always a good idea to consult a financial professional or licensed agent to ensure that your coverage level fits your unique needs and circumstances.

Frequently asked questions