Can You Have More Than One Life Insurance Policy?
A family should consider insuring the life of their primary breadwinner to make sure that the income stream is not interrupted should something happen to him or her. But when do you know you need multiple policies?
This article will give you examples and scenarios in which you can use multiple term life insurance policies by “laddering” them, to save money on premiums and provide an adequate financial safety net for your family at every stage.
What Type of Life Insurance Do I Need?
Most families’ needs are met with relatively inexpensive term life insurance policies. This type of policy is written for a set number of years of coverage, called the “term,” and if the insured lives past the end of the term there is no cash value.
In contrast, a whole or universal life insurance policy, sometimes called “permanent” insurance, accrued cash value as you pay premiums. You can borrow and lend from it. For many high-worth individuals who have maxed out other retirement planning and estate planning vehicles, a whole life insurance policy may serve a purpose. Most come with high fees, however, and the premiums are much higher than term life insurance.
In this article, we will show how layering, or laddering, different term life insurance policies can serve you.
What About My Employer’s Group Life Insurance Plan?
If your employer subsidizes the premiums or pays for them entirely, do participate in the group life insurance plan at work. While these plans typically offer death benefits limited to a multiple of your annual earnings, there may be other benefits available, such as an AD&D rider.
An Accidental Death & Dismemberment (AD&D) rider on your group life insurance policy further insures you against serious injury caused by an accident. The policy will payout for the injury, and if the injury is fatal, can double the amount of death benefit your beneficiaries receive. You may have to pay a small fee for an AD&D rider but it is well worth it.
What Is “Laddering” in Life Insurance?
When you “ladder” multiple life insurance policies, you are taking out multiple policies of different term lengths and differing amounts of coverage, depending upon your family’s anticipated financial needs. Policies will expire in time, saving you money in paying premiums for coverage you don’t need.
Laddering Life Insurance Policies for a Young Family
For example, if you are in your 20’s and married with young children, and you just bought a house, you could buy a 30-year $600,000 policy to provide for all anticipated needs such as paying off the mortgage and paying for college. But you would be paying premiums for this policy 29 years from now, when your children are grown and out of the house, and your home is almost paid off.
Instead, you might save money on premiums by laddering policies this way:
Policy #1 - 30 Year $100,000 to help pay off the last years of the mortgage
Policy #2 - 15 Year $200,000 to help with college expenses
Policy #3 - 10 Year $300,000 to pay the mortgage in the early years
You are creating a ladder that provides for the most amount of coverage early on when your family will most need it if you pass. The policies expire as your family moves into different stages of life, and you save money on premiums.
If you happen to die within ten years, your family still gets a total of $600,000 as in the afore-mentioned single 30-year policy, because all three policies are providing coverage. But if you die in 14 years, that 10-year policy will have expired and you will have paid less in premiums, and your family will get $300,000 from the two active policies. If you live another 29 years, you will have only been paying premiums on the 30-year policy, and your spouse gets a $100,000 death benefit to help pay off the mortgage and other end-of-life expenses.
Special Needs Children as Life Insurance Beneficiaries
The first example assumes that you will have less need for insurance coverage as time passes. For some families, this is not the case. For example, let’s say you and your spouse are in your 40’s and both work, you’re halfway through paying your 30-year mortgage, and have a teenage child with special needs who you are caring for at home. You want to provide enough coverage to pay for care for him or her for their lifetime. In this case, you might reverse the ladder:
Policy #1 - 30 Year $400,000, with a special needs trust as beneficiary
Policy #2 - 15 Year $50,000 to help pay off the last few years of the mortgage
Policy #3 - 10 year $150,000 to help pay off the mortgage
Be sure not to name a minor child as a beneficiary to your life insurance, because a judge will then have to appoint a guardian. You should make that decision, not a judge. With the help of an estate planning attorney you should create a special needs trust and name the trust as a beneficiary, and your spouse as trustee/guardian. Be sure to name a contingent trustee/guardian should something befall your spouse.
Providing for an Aging Parent with Life Insurance
If you have an aging parent living with you and you are caring for him or her, you might ladder policies a bit differently. Let’s say you and your spouse are in your late 50’s, your children are grown and self-sufficient, your house is almost paid off, and your live-in parent is in his or her 80’s and cannot live alone. You might consider laddering your insurance policies this way:
Policy #1 - 30 Year $100,000
Policy #2 - 15 Year $100,000
Policy #3 - 10 Year $400,000
In this scenario, you have the most coverage in the years your parent is still with you. The other two policies cover end-of-life expenses for you and leave something for your spouse.
Laddering is a technique that can be customized to meet the needs of any family, at any stage of life. Use it to spend wisely on premiums and still get the life insurance coverage your family needs.
About the Author
Veronica Baxter is a blogger and legal assistant living and working in the great city of Philadelphia. She frequently works with Chad Boonswang, Esq., a Philadelphia life insurance beneficiary lawyer.
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