Should I Diversify My Life Insurance Companies?

by Kevin on October 19, 2012

Life insurance is a critical piece of any family’s financial plan. Having life insurance protects your family, not you, from your untimely death. While that is unfortunate to think about it is an important piece of your planning especially if you are the sole bread winner for your family.

If you’ve never been through the life insurance quoting process it is a bit lengthy. You don’t just give your information and sign some papers. The initial quoting process is just a run through of questions about your lifestyle and health, but once you pick a firm to get a policy through they will normally require an analysis of your blood to gauge your true health. (The last time I got insurance they sent a travel nurse to our house to take it from me directly — very convenient.) If the analysis comes back normal you will get the quoted rate. If they find other issues your rate may go up.

I’m currently considering buying more life insurance, but it came across my mind that I might want to diversify the companies I have life insurance through while still focusing on getting the cheapest term life insurance available.

Why Diversifying Life Insurance Companies Makes Sense

Have we learned nothing from the financial crisis? Even huge financial institutions can be brought down in the proverbial blink of an eye, leaving their customers at risk or worse with losses.

While it is unlikely your life insurance company would go out of business, it does happen. Even so, the assets of the firm including the policies would be purchased either by a state guarantee fund or by another company. Nonetheless the turmoil can cause chaos if you — or namely, your family — happen to need to file a claim on the policy.

The first time I purchased life insurance I bought it through which quotes out multiple insurance companies at the same time. I was then given a list of options of firms with the price as well as their financial health rating. I could have gone with a lower rated company with a lower price, but decided to stick to relatively healthy firms.

If you are looking to add a new policy, it might make sense to add a different company with a similar rate than going back to the same firm again. This would protect you from any failures from one firm holding all of your policies.

Why You Shouldn’t Diversify Life Insurance Companies

On the other hand, instead of adding a new policy to an existing policy it may make more financial sense to cancel your old policy and get a new policy that is the size of both policies you would have had combined.

For example, let’s say you have a $250,000 term life policy right now, but you are looking to add an additional $500,000 policy because your income has gone up and you’ve got two kids now.

You have two options:

  1. Order a new second policy from either your existing firm or another insurer for $500,000
  2. Order a new policy from either your existing or a new insurer for the full $750,000 of coverage you need, and cancel your original $250,000 policy

The first option lets you stagger your policy terms which isn’t necessarily a bad thing. (If you were 5 years into a 20 year term life policy and buy a new 20 year term policy, you’ll have $750,000 worth of coverage for 15 years and $500,000 for the remaining 5 years.)

However, the first option might have a slightly higher coverage cost. You might be able to get an overall lower insurance cost by going with a bigger policy from just one insurer.

It really comes down to shopping around. Don’t just go back to your old insurer to get a second policy or a bigger overall policy. You need to check prices to make sure you’re getting the best overall deal.

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