Can you have multiple life insurance policies?
The answer is “Yes” but there can be disadvantages
Are you able to have more than one life insurance policy?
Often people are not sure whether they can have multiple life insurance policies.
In Australia you are not restricted in the number of life insurance policies you can have. Therefore you can have several policies covering the same person for the same event, e.g. death, with one or more insurers.
It is common to have policies both inside and outside super. Reasons for this are:
- Super funds can provide basic default life insurance cover at a low cost (although not always) without having to apply.
- However this cover is unlikely to be adequate for most people and may need to be topped up with additional cover, either inside or outside super.
- More comprehensive cover including Trauma cover and Own Occupation TPD cover is only available with personally owned policies.
- Income protection cover through super funds may be limited to just a 2 year benefit period and top-up cover may be required.
What to look out for when applying for additional policies
When you take out a life insurance policy you are generally asked whether you have any other policies and it is important that you answer this accurately.
Insurers use this information to determine if you may be overinsured.
If the total of all your policies will exceed what the insurer considers to be reasonable, based on a multiple of your income, they may refuse to provide the additional cover you are requesting.
You will also be asked if you will be cancelling your existing policy once your new policy is in place and you must answer this correctly.
If you tell the insurer you will be replacing your existing cover, but then do not cancel your old policy, you could find that the new policy you have taken out will not be valid.
If you have two life insurance policies – will both insurers pay claims?
Usually as long as both policies are valid, i.e. there are no exclusions which apply and you meet the criteria to claim, you will be able to lodge multiple claims.
For your policy to be valid you must have met your duty of disclosure to the insurer when you applied with regard to your medical history, family history, occupation, pastimes and any other policies you had in place.
However, there are some situations where multiple policies may impact on each other:
- Income protection policies usually have a built-in offset clause which caps the total percentage of your income you can receive from all policies. Therefore if you have two income protection policies and the sum of the monthly benefits exceeds the limit (70% or 75% of your income) you could be overinsured. Should you make a claim one of the insurers will reduce the amount they pay so that the total benefit does not exceed the limit.
- Usually income protection and TPD claims are treated separately. However there are some super funds who will stop temporary incapacity payments if you are deemed permanently disabled and eligible for a TPD payout.
Does it make sense to have multiple life insurance policies?
There are a number of reasons why you might want to have more than one policy, many of these relate to diversifying risks and accessing different features and benefits.
However there are several disadvantages to maintaining multiple policies, most of which relate to increased costs and administration.
| PROS | CONS |
|---|---|
| Spread risk in case of insurer default | Extra complexity at claim time – more forms to fill out and doctors’ reports |
| Different policies for different purposes or beneficiaries | Miss out on discounts for larger sums insured |
| Access health rewards and benefits from different insurers | May end up paying multiple policy administration fees |
| Take advantage of super default cover with no underwriting | Underwriting required for additional policies – blood tests etc |
| Select cheapest insurer for each type of cover | Miss out on multipolicy discounts for bundling covers |
| Split cover between stepped and level premiums | Multiple premium payments required to be made |
| Different terms available from different insurers due to underwriting guidelines | Could end up being overinsured with more cover than you need |
| Some policies may be easier to add to over time than others | Could forget to disclose existing covers impacting the validity of later policies |