Should I take out multiple life insurance policies?
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Last updated: 06/10/2020 | Estimated Reading Time: 5 minutes
With most insurance products, such as home or travel insurance, it doesn’t make sense to take out multiple policies. You’ll be doubling up coverage unnecessarily and for no benefit - you’ll pay two premiums, but the contribution clauses embedded in most policies mean that you won’t get a higher level of compensation. Under these clauses, insurers can get away with only supplying a portion of any payout if it’s found you have coverage elsewhere.
But life insurance works differently and it isn’t uncommon for people to hold multiple life insurance policies. That isn’t to say you should seek out multiple policies from the start. It will generally be cheaper and less complicated to simply find one policy that meets your needs. But those needs can change over the policy’s term and your lifetime. Sometimes it makes financial sense to take out a new life insurance policy while maintaining your existing cover.
Sometimes circumstances require you to need a different level of life insurance cover than you initially negotiated. You may purchase a new property with a larger mortgage or have more children and need to increase your sum insured.
Sometimes you can adjust your existing policy to increase the potential payout, but you might find you need to take out another policy to deliver the level of coverage you need. Alternatively, if you start a new job, you may also be offered a policy through your employer. In this case, you might either want to cancel or maintain your existing policy, depending on your circumstances.
In some cases, if you can keep up with the premiums and paperwork, it makes sense to keep two or more life insurance policies. This is particularly true if you obtained the initial policy years before - when you were younger or before you developed certain health conditions. It will likely be more cost-effective to maintain that policy and take out an additional one to top it up than to cancel it and start from scratch with a new insurance product.
If you hold multiple life insurance policies, they exist separately from each other. Your beneficiaries will be able to claim the full sum insured on all of them after your death.
Changing life circumstances and financial needs may require you to increase the sum insured or extend the term of your life insurance policy. The easiest, most financially sensible way to do this might be to obtain an additional policy, increasing your total sum insured.
Situations in which you might need additional coverage, or a longer term, include:
For instance, if you take out a life insurance policy following the birth of your first child and then have two more children, you might find the sum insured isn’t enough to meet the needs of your larger family. You might want to increase your coverage to ensure the payout could fund the education and support of all your children after your death. Alternatively, you may divorce and become a single parent and need to increase your sum insured to reflect the fact that your child only has you to rely on.
You might also want to extend the term of your life insurance policy, say if you buy a new home and take out a new 25-year mortgage or you have another child later in life. If you’re unable to extend the term of your current policy, you might need to take out another one. It will generally be more cost-effective to do so now rather than wait until the other one expires and you’re older and possibly less healthy and therefore face higher premiums.
Before you seek out another life insurance product, it’s sensible to talk with your current provider. Ask if you can adjust your current policy, either increasing the sum insured or extending the term. Your premiums will increase following these adjustments, but it could be cheaper than taking out an additional policy. Get information about the terms and costs of adjusting your policy from your provider before running a search for an additional policy and compare the costs. The easiest way to save money is to always compare life insurance quotes.
In most cases, the policy you took out earlier in life will be cheaper than the one you take out later, so you generally won’t want to cancel your existing policy. It’s generally more cost-effective to adjust it or top up the sum insured or the term length with an additional second policy.
But if your insurance needs have changed dramatically, keeping the additional policy might be more hassle than it’s worth. Alternatively, if your health and lifestyle have improved since you first secured insurance - perhaps you’ve given up smoking, lost weight, or ditched your career as a race car driver for a desk job - you might find lower premiums now, even with more years under your belt.
Your employee benefit package may include death in service cover. This will provide your beneficiaries with a tax-free lump sum, usually between two to four times your salary, if you die while employed by the company.
Death in service cover is a type of life insurance, but don’t assume it will meet all your needs. It’s not uncommon for people to take out separate life insurance policies to top up their death in service benefit, which may not provide a large enough sum insured. Additionally, you’ll lose any death in service benefit if you change job, are made redundant, or are unable to work due to illness or injury. You may want to obtain, and then keep, an additional life insurance policy that will remain intact no matter your employment status.