You need life insurance if your death would hurt anyone financially. For many people, one policy is enough.
But for some, two or more make sense. Your needs should drive the number and type of policies you buy.
How many can you buy?
You can own multiple policies from different companies. But when you apply, insurers will ask about current coverage to make sure the amount you want is reasonable, says Brian Ashe, executive vice president of Life Happens, an educational nonprofit supported by insurers.
You can buy a lot without raising eyebrows. Insurers typically will ask for justification if the total coverage would exceed 20 to 30 times your income, he says.
Multiple term life policies
The most common reason to buy coverage is to replace income in case a breadwinner dies prematurely. The solution: term life insurance, which covers you for a certain period, such as 10, 20 or 30 years. Ideally, by the time the term expires, you don’t need life insurance: Debts are paid, the kids are grown up.
Instead of buying one large policy, you could buy multiple policies of different lengths and amounts to match needs over time. For example, rather than a 30-year $1 million policy, you could buy three policies:
- 10-year, $500,000
- 20-year, $300,000
- 30-year, $200,000
This “laddering” strategy can save money, says Dennis Rupp, director of insurance wholesaling at TIAA, a financial services provider. And it can work if coverage needs diminish and you can accurately predict them. “But spoiler alert: Life is really messy,” Rupp says.
If you decide to buy just one policy and find later you don’t need as much life insurance, most insurers will let you decrease the coverage and pay less, Ashe says.
Different goals, different policies
You may have other reasons to buy coverage, besides replacing income. Some examples:
- Small-business owner needs: You may need a term policy to take care of the family and another to cover business loans or fund a buy-sell agreement.
- Long-term care: A hybrid life insurance policy can be used to pay for long-term care if you need it. If you don’t max out the benefits for care, it pays out at death. You might own traditional life insurance to take care of financial dependents and a hybrid policy to cover long-term care.
- Estate planning: If you want to leave life insurance money to someone no matter when you die, you’ll need a permanent policy, such as whole life. Certified financial planner Chris Chen of Insight Financial Strategists in Waltham, Massachusetts, advises buying term life for finite needs — the period when others depend on your income — and choosing a permanent policy for estate planning.