When two policies are better than one
By Steven Kobrin
Steven H. Kobrin, LUTCF
Life insurance is used to address a variety of needs.
Personal needs can include your family's financial security; protection of estate assets; indemnification of a mortgage; and college funding.
Business needs can include funding of partnership agreements; indemnification of business loans; key person insurance; and provision of an elite benefit to executives.
Planning can become challenging when different needs require different amounts of life insurance for different time periods.
For example, the need for income replacement is based upon current and projected income, and it is needed during only the working years. Meanwhile, the need to indemnify a business loan typically calls for a fixed amount regardless of your total income — and for a specific time period, even if you stop working.
A single policy can not cover all these different needs. The solution is to purchase multiple policies and layer them according to the protection that is needed.
For example, you could purchase one policy for family protection and a separate policy for business loan indemnification. Each policy would have the face amount and premium guarantee period needed for its specific purpose.
This strategy becomes especially interesting when you consider that a combination of both term and permanent insurance can be utilized. Keep in mind that permanent insurance can be designed to provide a lifetime premium guarantee. Thus, layered policies can help you bypass the limitations of a single policy.
Here are some guidelines to follow if you are interested in meeting different needs by layering your life insurance policies.
1. Disclose the total face amount.
This may seem an obvious point. However, if you decide to apply with multiple carriers, it is easy for the whole picture to get lost. So make sure that every carrier knows the total face amount you will need — i.e., the total combination of all the coverages needed.
2. Sort out the owners and beneficiaries.
Owner and beneficiary designations may differ on policies that address different needs. Be sure to clarify the various players and their roles, and consult with your legal and tax advisers to understand the ramifications of each designation.
Keeping a written chart is an indispensible tool, as the scenarios can become complex. For example, a policy used for the purpose of family protection can list you as the insured and the owner, your spouse as the primary beneficiary, and a trust as the contingent beneficiary. Meanwhile, a policy used for the purpose of key person insurance can list you as the insured, while your business could be the owner and beneficiary.
3. Get prequalified.
Life insurance prequalification is essential when considering multiple policies, especially if multiple carriers will be involved. Prequalification will enable you to be sure you're getting the best underwriting possible.