Many Canadians already have multiple life insurance policies. And for some households, buying 2 or more life insurance policies can be a wise move. For example, you may want to carry a term life policy that covers your mortgage. A smaller whole life policy that never expires might also fit your needs.
Some people even “ladder” term life policies, using a different policy to cover each financial obligation or time frame. For instance, a longer-term policy can cover expenses until the kids are grown. A shorter-term policy can protect your family while you’re getting a startup business off the ground. It might make sense to have both — or even additional policies.
Here are 5 things you should know when considering buying multiple life insurance policies.
- Avoid applying with multiple insurers at the same time
- There is a limit on coverage
- Disclose your current coverage
- Proof of income and assets
- Additional medical underwriting
While buying 2 or more life insurance policies is legal, timing can play a role. If you have a long-established policy, applying for a second policy shouldn’t be a problem. But if you’re applying for 2 (or more) policies at once, you’ll want to avoid applying with multiple insurers.
In the US and Canada, life insurance companies share information through the MIB Group. The MIB tracks policies and coverage limits. If you apply for 2 or more policies at once, both companies will check with the MIB Group as part of their underwriting. Multiple applications can lead to confusion and delays. The situation can even lead to declined applications in some cases.
Instead, work with an insurance broker to streamline the process and reduce confusion. Your life insurance broker can help guide you through your choices, such as when to buy life insurance. But your broker can also explain your options and the benefits of each. This step helps ensure the choices you make align well with your goals for your life insurance coverage.
While there isn’t really a limit on how many life insurance policies you can have, there are practical limits. More policies can be challenging to manage. But more importantly, you’ll find limits on the amount of coverage you can have based on income, age, and existing coverage.
For example, an adult aged 40 or younger can usually buy coverage for up to 25 to 35 times their annual income. By contrast, some insurers may limit a 60-year-old applicant’s death benefit to 5 times their yearly income. Insurance providers consider how many working years you have remaining.
Coverage limits span all policies. If you qualify for a total of $500,000 in coverage but already have $300,000 in coverage, you can only buy another $200,000 of life insurance.
Age and income both play a role. But health conditions, vocation, and hobbies can also affect how much coverage you can buy.
Discuss your life insurance needs with your partner to target coverage amounts that fit your real-world needs. Then, work with a trusted broker to learn how to reach your coverage goals.
Honesty is the best policy, and that’s doubly true when it comes to life insurance. When you’re applying for life insurance, you’ll have to disclose your current coverage.
Your existing policy data is available through the MIB Group. The information you give to your insurer must match the information they find in the shared database. Your insurer will verify the information you provide when you apply. But they may also check before paying a claim.
A misrepresentation on your life insurance application, even if unintentional, can lead to a denied application. It may even cause a claim to be rejected or cause the insurer to cancel your policy in some unfortunate cases.
For higher amounts of coverage, you may need to provide proof of income to your insurer. For example, if you apply for a $5 million policy, your insurer may request proof of income through a third party. Your accountant can help you with the documents you’ll need.
You may also need to document your assets and liabilities. However, for lower total coverage amounts, you can expect fewer requests for proof.
In effect, you’re showing that the policy covers a financial loss for others if you die during the coverage term.
Consider an extreme example. If you earn $10,000 per year and expect to work for 10 more years, you probably won’t be able to buy a $10 million policy. Your lost income won’t exceed $100,000. The insurer can’t issue a policy for 10 times your expected earnings.
Life insurance, like other insurance types, isn’t meant to create a windfall. Instead, it aims to cover an actual financial loss.
As you add policies and increase your overall coverage, your insurer may need more medical information. For example, many insurers require additional medical reports when applying for $1 million or more in coverage. EKG or ECG tests are common for life insurance applicants 50 years or older, for instance.
Medical underwriting requirements may be less intensive for smaller life insurance policies. For higher coverage amounts, however, insurers need a more detailed view of your overall health.
Medical conditions can also limit your coverage amount eligibility in some cases.
The good news is that life insurance rates often benefit from additional medical information. If you’re in good health and underwriting comes back with minimal risk, your rates reflect lower risk.
Preparing for multiple life insurance policies
For some households, a multi-policy strategy works best. But you’ll want to approach the process carefully. For larger coverage amounts, you may need additional documents to show your income or assets. You may also need to get some extra medical tests done.
Consider working with a life insurance broker to help you navigate your purchase. An experienced broker can smooth the process and guide you through your coverage options. You might even discover a better strategy or a more cost-effective way to protect your family with life insurance.