Diversification is a well-known strategy for reducing the risk inherent in financial products. By spreading money around in different instruments you can minimize your exposure to any negative impact that may arise if one particular investment falls in value. However the concept of diversification is not as common when it comes to life insurance. Like most people you may see a life insurance policy as a necessary aspect of a balanced financial strategy because it takes care of those you leave behind in the event of your passing. However it is also possible to minimize the risk of losses on your insurance portfolio by implementing a diversification strategy.
There are two main ways to diversify your life insurance portfolio and they are;
1) Use Several Insurance Companies
2) Have Both Term and Whole Life Insurance
Use Several Insurance Companies
Although it is possible to make a reasonable assessment of the strength of an insurance provider by their industry ratings and the size of their market share, the folding on industry giants in the financial services sector can shake consumer confidence to the core. To avoid placing all your trust in one company you can split your policy coverage up into smaller amounts that are spread over several different companies. This is certainly a more expensive option. For instance, it will cost more to be insured by four different companies for $250K each than it would cost to take out a million dollar policy with one provider, but the advantage is the assurance that your entire life insurance coverage is not dependent on the survival of a single company. It is up to you to decide if the added peace of mind is worth the additional cost.
Have Both Term and Whole Life Insurance
Another way to diversify your life insurance is to have both a term and a whole life policy. Much has been said about which type of insurance coverage is better than the other, but if you want to cover all your bases you can diversify and put a little into each type of coverage. A term life policy is a pure insurance product and has set conditions. You pay a fixed premium for the length of the policy and your beneficiaries receive the death benefit attached to your policy in the event that you pass away before the end of the term. If you outlive the term policy you get nothing and your beneficiaries get nothing. Under a whole life policy there is an investment element that continues to build cash value as long as your policy is kept in force and the policy will also last until you eventually die.
These two options for diversifying your life insurance may go against the norm, but they offer comfort in exchange for slightly higher premiums.