Life insurance is an essential part of planning for your family’s financial security. But as your financial situation changes over the course of your life, so too will your insurance needs. Many people reach a point where getting an additional life insurance policy is beneficial for their financial plan.
Any life insurance you have needs to offer enough coverage that your loved ones will be able to recover financially if you die — and it should last long enough to meet all of your obligations. Working with a licensed advisor can help you make sure you have all the coverage you need — and get additional coverage if needed.
What is supplemental life insurance?
It’s common for people to have more than one life insurance policy. Whenever your financial situation changes – if, for example, your salary increases or you get a mortgage – it’s good to reevaluate your financial needs to make sure your family is protected. If you do need more coverage, it’s usually simpler and cheaper to get an additional policy rather than replacing your existing one.
Getting additional coverage is a simple process. There’s no limit to the number of life insurance policies you can have, but most insurers have a limit on the total amount of life insurance that they’ll offer you. This limit is usually based on your age and income.
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Do you need additional life insurance?
Whenever your financial obligations change or a major life event happens, it’s a good idea to review your life insurance coverage so you feel confident that if you die, those financial responsibilities will be adequately covered by the payout from your insurance.
Some common reasons to consider increasing your life insurance coverage are:
Co-signing or taking out any loans
Buying or refinancing a house
For example, many people first buy life insurance when they buy a home in order to cover their mortgage payment if they were to die. If you’re getting life insurance to help pay off a mortgage, you’ll probably get a 30-year term life insurance policy to cover you until your mortgage is paid off.
But then if you have a child later on, your coverage needs will increase again. Rather than replacing your first policy with a new one, you could add a supplemental 20-year term policy for additional coverage that will last until your child becomes an adult.
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How much additional life insurance do you need?
There are many ways to evaluate how much life insurance you need, but here’s a simple way to determine your total needs:
Add up your current and future financial obligations — such as debt, everyday household expenses, and childcare.
Subtract your liquid assets — such as any savings and retirement accounts.
That’s it. The result is the amount of coverage you’ll need.
You’ll also want to think about how long your coverage needs to last. A 20-year mortgage would require a 20-year term policy. This would ensure that if you were to die before the loan was paid off, your spouse would receive enough money to pay off the debt and keep your house.
Similarly, if you have kids whom you plan to support for the next 18 years, you want a policy that lasts at least long enough to cover their anticipated expenses if you die.
If you can, you also want to provide a cushion for any unexpected life events. For example, it’s very common to refinance a home or upgrade to a larger and more expensive home.
Either scenario may mean that your original term policy won’t provide enough protection to cover all of your debt, in which case you’d want to add coverage or buy a new policy.
Learn more >> How long your life insurance should last
How to add life insurance coverage
You have two options to make sure your coverage is adequate.
Converting your term life insurance policy to a whole life insurance policy, or
Purchasing a new life insurance policy altogether
Converting your term coverage to whole coverage
You can’t increase the coverage amount of your term life policy, but you may be able to increase the term length by converting the policy to a permanent policy.
While your monthly premiums with a permanent life policy would be significantly higher, your coverage would last for the rest of your life.
Converting to a permanent policy can be a good option if you’re older or have had health problems since you first applied for life insurance, or if you have adult dependents who rely on you for coverage.
If you decide to convert your policy, try to do so at least six months before your term length expires to avoid a coverage gap. And if your insurer doesn’t offer the option to convert your policy, budget enough time to purchase a new policy before your current policy’s term ends.
Applying for a new life insurance policy
If you’re not able to convert your term life insurance policy (or the premiums are too costly to do so) applying for a new life insurance policy may be your best option to get additional coverage.
Your new policy could replace your original policy or it could be stacked on top of your current policy by using the ladder strategy.
The ladder strategy is a way to save money on premiums by giving you maximum coverage now and having that coverage taper off and expire as your financial obligations decrease.
There are some things to keep in mind if you’re shopping for additional life insurance:
1. You’ll go through underwriting
When you apply for a new policy, the insurer will evaluate your overall risk — a process called underwriting that can include taking a medical exam. If your health has changed since or you’re significantly older than the first time you applied, your new policy can be more expensive.
The good news is that the whole application process should be less stressful this time, as you’ll already know what to expect.
2. Don’t cancel your current policy immediately
If you’re considering replacing your existing policy, don’t cancel it until the new one is active.
Canceling your original policy prematurely could leave you without coverage and if you die, your loved ones won’t get the financial support you’ve intended for them. Once your new policy is officially active, you can cancel the old one without penalty.
3. Have your first policy’s details handy
When you apply for a new policy, the agent will ask you about current policies and amounts. It’s important to have details about your current coverage ready when you apply to save time and avoid additional paperwork.
Insurance is carefully regulated, and the person who evaluates your application will want to make sure you’re not overinsured.
4. Be prepared to pay higher premiums
If it’s been several years since you first applied for life insurance, the premiums you’re offered this time around will probably be higher than the first time you applied.
Policy premiums increase about 4% to 9% every year based on your age — and any changes in your health can have an additional impact on how much you pay. While there are some people whose health improves significantly over time — often by quitting smoking or losing significant weight — most people’s health declines as they age, and this ultimately makes your coverage more expensive.
Learn more >> Buying life insurance if you have a pre-existing health condition
Buying additional life insurance when you have group life insurance
If you have group life insurance through your employer, you have two options to increase your coverage.
Buy supplemental life insurance through your employer-sponsored group plan
Purchase a private, individual term life policy
Supplemental life insurance (also known as voluntary life insurance) is employer-offered coverage made available on top of your group life insurance at an additional cost. Getting this type of policy can be risky as your coverage won’t follow you if you change jobs.
Purchasing your own term life insurance policy is the best option for most people because it’s often cheaper than supplemental life insurance and you won’t lose your coverage if you leave your job.
