Should you—or can you—have more than one life insurance policy!? We occasionally hear this question and the answer may be very important to your wealth! So beyond a simple “Yes,” let’s consider why people have “portfolios” of investments and how the concept applies to life insurance.
An investment portfolio typically contains a range of diverse investments. With different asset classes, industries, and financial vehicles, a well-designed portfolio prevents you from “putting all your eggs in one basket.”
A portfolio may begin quite simply with a savings account and an index or mutual fund. Then, as the portfolio and its owner matures, other assets are added. Over time, a portfolio might include:
- other stocks, bonds or securities
- cash equivalents (including life insurance cash value)
- real estate investments and bridge loans
- private equity funds
- hedge funds
- alternative investments such as life settlements, oil and gas, or business partnerships
- precious metals
- and perhaps very speculative investments such as cryptocurrencies or IPOs.
Some investments are held for the long haul. Others, for shorter time periods. And you wouldn’t expect the investment portfolio you have at age 25 to look the same at age 65. And yet, we’ve noticed a blind spot of sorts in many otherwise diverse portfolios. Sometimes, life insurance strategies don’t similarly evolve to fit changing lives!
No one would dream of having a “portfolio” with only one stock or bond, and most real estate investors desire a portfolio of properties. Yet many people fail to go beyond the life insurance policy (singular) they purchased decades ago! It may still be a good policy—and likely has lower premiums than a policy you could obtain now because of your age. And yet… your life, your needs, your desires and something called your “human life value” (HLV) all change profoundly over time.
Not only can you have more than one life insurance policy, but there are reasons why multiple policies are an excellent idea. There are also advantages to multiple smaller policies over one larger policy. Let’s look at four reasons to consider a life insurance “portfolio” rather than one life insurance policy.
First, your needs and desires change over time.
You might acquire your first term life insurance policy as a young adult, or you might already have a whole life policy that was started for you as a child. When you are young with no dependents, a small policy can make sense. But what happens as a person grows older? Statistically, people tend to marry, have children, and buy a home (though not necessarily all three or in that order).
Marriage, children, and homes are milestones that represent responsibilities and commitments. They are also life events that motivate many to acquire one or multiple life insurance policies.
Of course, the desire for a death benefit is not the only reason for life insurance. Many people purchase whole life insurance primarily as a long-term savings vehicle that offers minimum guarantees, tax advantages, and an excellent chance for dividends. (Dividends are not guaranteed, but have been paid for over 100 years through every economy.)
Policies also provide protection against unexpected costs and liquidity for opportunities during the life of the insured. Besides the cash value of a whole life policy (which can be accessed for any reason) special riders allow a portion of a death benefit to be advanced in certain circumstances. For example, in the event of a terminal illness diagnosis, an accelerated death benefit rider would pay a benefit to the insured. Whole life insurance policies make extremely effective emergency funds because of their flexibility and ability to protect a family against so many possibilities.
Secondly, your Human Life Value (HLV) typically grows over time.
Human life value is a financial term used to determine a person’s insurability. It represents the economic value of a life. Insurance companies use it to determine how much life insurance they can issue on an individual. The term also comes up in courts during wrongful death lawsuits.
Some individuals can acquire more life insurance than others. For instance, most children could not qualify for a multi-million dollar policy unless the family is wealthy or famous. In contrast, it would be common for a high-earning CEO or business owner to obtain one or more multi-million dollar policies.
HLV is roughly equal to 15 to 20 times a person’s income (or 1 x gross net worth). As a person earns more, they can qualify for (and afford premiums for) a new policy. At the same time, their desire for greater liquidity, savings and protection also increase.
Third, “timing is everything” applies to life insurance.
There are advantages to having multiple life insurance policies that have different term lengths, anniversary dates, or payment periods. Let’s see how it can work.
Somewhat similar to the concept of a CD ladder, some people build a “life insurance ladder” with policies of different term lengths. Of course, term insurance is for a set period of time, such as 10, 20 or 30-years. Whole life policies are permanent (provided premiums are paid).
A couple could obtain multiple policies to insure their full human life value and protect each other from loss of income with relatively affordable premiums while getting established in careers and raising a family. They might have term policies in place until their children become independent, other policies to last until age 70 or beyond, plus convertible term policies that would allow them to convert term into whole life as they are able.
Since whole life is such a excellent savings vehicle, we recommend adding smaller whole life policies over time as income rises. In this way, when term policies expire, you’ll have permanent life insurance in place. These policies create a legacy you can’t outlive. Whole life policies also provide multiple avenues for cash or cash flow in one’s later years should you need the money yourself.
There is also an advantage to having policies with different anniversary dates. Since it is most efficient to fund policies annually rather than quarterly or monthly, it helps if the premiums don’t all come due the same month or season!
And in certain circumstances—when you receive a large windfall, have ample liquidity and income, and your primary goal is preserving and maximizing the lump sum as an inheritance—a single premium whole life policy can make sense.
Fourth, it is beneficial to own more than one policy — and different types of policies.
Owning multiple policies increases control, safety, flexibility and your ability to diversify the policies you own. Some examples might be:
Different types of life insurance. We recommend both term life insurance—preferably convertible term insurance—and permanent whole life insurance. Many people benefit from a blend of both. Eventually, the term policies will run their course and you will still have the whole life.
Policies with different riders, such as one with a long-term care benefits rider and another with a terminal illness rider.
Policies with different insurers and terms. You may want a whole life policy with a fixed rate loan and another with adjustable rate loan. Or you may wish to have multiple smaller policies from different life insurance companies rather than one large policy from a single company.
Insuring multiple generations. In addition to insuring yourself and a significant other, if applicable, some people insure children, grandchildren, and/or perhaps a parent. You can benefit from each policy as it increases your savings and the cash available to you. Whole life insurance is also an excellent way to pass wealth to the next generation!
Utilizing multiple life insurance policies.
A life insurance portfolio can give you more options for savings, protection, and in time, cash flow. Whole life is a very flexible product and policies can be used in different ways at different times. Your focus might be on saving. Others might leverage their cash value to create income through investments. For others, life insurance is primarily a legacy vehicle. And for all, whole life provides access to cash in the event of an emergency.
You may wonder… what happens if, some day, you no longer want multiple life insurance policies? This is where a life insurance portfolio can create greater flexibility! With multiple policies, you can choose to:
1. Gift a policy to an adult child. If you own a policy and your adult child/grandchild is the insured, you can transfer ownership to them and they can take over payments. This is a fabulous way to transfer assets easily (and tax-free) and give children a “head start” on saving! (We explain this and other multi-generational strategies in our Perpetual Wealth book.)
2. Gift a policy (or death benefit) to charity. This is a great strategy to support a charitable cause, church, or educational endowment. Plus—you’ll likely get a tax deduction! (Consult your tax advisor.)
3. Annuitize a policy. This is a wonderful cash flow strategy we recommend for those in their 70’s or beyond.
4. Sell a policy. If you are in your 80’s and have a sizable policy you no longer feel you need, selling a policy to an investment fund (or possibly even a friend or family member) may be a viable option.
5. Stop or reduce payments on one or more whole life policies—without giving up the policy! Depending on the policy, you may be able to utilize a paid-up option or another strategy. We explain the multiple options for reducing or eliminating premiums for more mature policies in this article.
6. Surrender a policy and keep the cash surrender value. Surrendering a policy is always an option, although we encourage you to see if there might be a better option.
7. Keep the policy and use it to strategically reduce other expenses. Could the presence of a death benefit allow you to spend your money differently right now? Yes it can! For instance, a policy can allow you to sequence the spending of your assets in such a way that you save on taxes and have more money to spend!
Your needs WILL change over time. That much is inevitable. As you can see, having more than one life insurance policies will give you more benefits, flexibility, and control than a single policy.
What questions do you have about building a life insurance portfolio? Consult your Prosperity Economics Advisor and they will be able to provide you with answers. And if you need an advisor who truly understands life insurance… contact the Prosperity Economics Movement today!