Pros & Cons of Owning Multiple Life Insurance Policies

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Article Contents
Picture of By <span>Matthew Roberts</span>
By Matthew Roberts

Updated on December 4, 2024

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Picture of By <span>Matthew Roberts</span>
By Matthew Roberts

Updated December 4, 2024

Visit author page

4 minute read

Article Contents

Life insurance is the best way to provide your family with a financial cushion and peace of mind in the event of your passing. However, for many Canadians, the stakes are high – balancing a mortgage, family obligations, and long-term financial goals. So, some might consider having more than one life insurance policy. But is it worth it?

Explore why having multiple life insurance policies might be worth considering while understanding its implications.

Multiple Life Insurance Policies At a Glance

  • You might consider more than one life insurance policy for many reasons, such as covering specific financial obligations or listing multiple beneficiaries.
  • While getting multiple life insurance policies can benefit you, they can also be challenging to manage and cost you more than your budget can afford.
  • Instead of getting multiple life insurance policies, you might consider increasing your policy coverage, for example, by getting a policy rider.

Why Consider Having More Than One Life Insurance Policy?

Whether to safeguard your mortgage or enhance your family’s financial safety net, you might consider multiple life insurance policies for many reasons. Here’s a breakdown of the most important considerations:

Tailored Coverage for Different Needs

Life insurance isn’t a one-size-fits-all solution. If you have multiple financial obligations, having more than one policy can provide coverage for mortgage protection, income replacement, and education costs (if you have children).

A term life insurance policy can cover short-term needs like loans and dependent care, while permanent life insurance can cover lifelong needs like estate planning and final expenses.

Flexibility for Evolving Goals

Multiple life insurance policies can help you adapt to maturing goals through different life stages. For example, start with a term policy to cover student loans, then add another to ensure income replacement and provide childcare in the future. 

As you enter middle age, you might add a permanent policy for estate planning and retirement savings and maintain a final expense policy for funeral arrangements.

Multiple Death Benefits for Bigger Families

If you have a big family, you can use multiple life insurance policies to tailor support for each family member. For example, you might dedicate one policy to provide income replacement for a spouse and another to fund your children’s education and other needs. You might also get a permanent life insurance policy to leave an inheritance or cover estate taxes.

Estate and Legacy Planning

While Canada doesn’t have a direct inheritance tax, capital gains on specific assets (like investments or real estate) can result in estate taxes. You can use a permanent life insurance policy to provide funds to cover these taxes.

If you plan to divide your estate unequally, having multiple life insurance policies can balance this distribution by allowing you to assign a separate policy to each beneficiary. You might also have another policy to leave a legacy for charity causes.

Why Do Canadians Consider Multiple Life Insurance Policies

Challenges and Considerations for Multiple Life Insurance Policies

While having multiple life insurance policies can offer flexibility and comprehensive coverage, managing them can be complex and lead to the following challenges.

Higher Premium Costs

Naturally, more life insurance policies mean paying more premiums, which can rise over time, especially if a policy lapses and you need to renew it. In addition, each policy might charge administrative costs, riders, or additional features you might not even need.

Another price consideration is that by spreading coverage across multiple policies, you lose the cost savings you get from bulk coverage discounts and streamlined underwriting.

Complex Management

It should go without saying that managing multiple life insurance policies isn’t easy. Each policy may have its own premium payment schedule, which can be challenging to track and result in missed payments. You must also monitor beneficiary designations, keeping them updated as life circumstances change. 

If you have multiple-term life insurance policies, you’ll have to monitor policy renewals, which may happen at different times. 

Tax Implications

Usually, a life insurance policy’s death benefit is tax-free. However, some policies may have tax implications depending on how you structure them. For instance, if you forget to name a beneficiary on a particular policy, your estate will automatically take its place, subjecting the payout to probate fees. These probate fees may vary across Canadian states. Ontario, for instance, charges $15 per $1,000 for estates over $50,000, whereas Manitoba eliminated probate fees in 2020.

If you have a policy accumulating cash value, withdrawals or loans against the policy can be taxable if they exceed the Adjusted Cost Basis (ACB). 

Alternatives to Multiple Life Insurance Policies

Multiple life insurance policies can pose undeniable benefits, but weighing your options before deciding is best. Here are some reasonable alternatives to consider. 

If you’re considering multiple life insurance policies because you want additional coverage, you can increase coverage on an existing policy instead. Many insurers offer this option, and they come with lower administrative costs. 

Depending on your insurer, you can also increase coverage without additional medical underwriting, which can be helpful if your health has declined since getting the policy. 

Instead of purchasing new policies to cover specific needs, you can get those needs covered by an insurance rider. For instance, if you need insurance to cover an illness, you can get a critical illness rider to ease the burden of outstanding medical costs. 

If you have children, you can get a child term rider, which covers them under the same policy. Other helpful riders include coverage for accidental deaths and a disability waiver of premium. 

Suppose you started with a term life insurance policy and decide you want a permanent one. Instead of applying for a new policy, you can convert your existing one without a medical exam. You’ll avoid the burden of complex management and undergoing more medical underwriting.

Term laddering involves purchasing multiple life insurance policies with staggered expiration dates. You can use them for specific financial obligations, such as a 10-year term to cover a car loan, a 20-year term to cover a mortgage, and a 30-year term to cover other needs like income replacement.

Key Advice from MyChoice

  • Consider why you want to get multiple life insurance policies and determine whether it’s easier to adjust your existing life insurance policy instead.
  • Match coverage to specific goals. Consider short- and long-term goals, such as paying off a mortgage or leaving an inheritance. 
  • Evaluate the flexibility of a single policy and consider customizing it with riders or increasing your coverage to meet specific financial needs.
  • Consult an insurance advisor to help you determine whether multiple policies are necessary. They can help you identify cost-effective solutions and prevent overlaps in coverage.

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