Life insurance laddering

Life is always changing, which means that your life insurance needs are often changing, too.

As a newlywed, you want to protect your spouse financially if something happens to you, so they can cover the mortgage or other daily expenses. When you start growing your family, your financial needs often grow alongside them – moving to a bigger house, supporting your kids, and saving for the future. As a retiree, many of your biggest financial responsibilities are behind you, but you may want protection to cover financial expenses or medical bills and to leave something behind for your partner or family.

Life insurance is meant to protect you for the long haul, but sometimes you need more flexibility over time than one policy can provide. Buy too much coverage, and you can end up paying for more than you need once big financial commitments are behind you. Buy too little coverage, and your family could be at financial risk.

That’s where life insurance laddering can help. Laddering life insurance policies involves buying multiple term life insurance policies, so that your coverage increases and decreases with your needs over time. Laddering is a popular strategy that can help you make sure you’re protected and save you money over your lifetime, compared with buying one large policy from your insurance company.

Wondering if it’s right for you? We have the facts to help you make the best choice for your family.

What is the ladder life insurance strategy?

People typically use life insurance laddering as a way to take advantage of the flexibility of term life insurance.

First, the basics: There are two major types of life insurance, term and permanent life. Term life insurance is the most affordable type of life insurance and covers you for a specific period of time, usually from 10 to 30 years. If you die during the term length, the insurance company provides a payout to your loved ones. Permanent life insurance, on the other hand, covers you for your entire lifetime and also builds cash value.

Just like home or auto insurance, term life offers “just in case” coverage that you hope you won’t need to use. Since your coverage expires at the end of the term, it’s an affordable way to protect your family during the exact times that they need it most.

So how do you ladder life insurance? With the ladder life insurance strategy, you stack – or ladder – multiple term life policies so that they expire at different times. This can help make sure that you have adequate protection at every stage of life and that you’re paying for the coverage you need today, not what you needed 10 years ago.

Stacking multiple policies can help you boost your coverage at key points in life to meet changing needs like:

• Giving birth or adopting a child
• Buying a home or moving into a larger home with a bigger mortgage
• Getting a promotion at work, so your family is relying on a bigger paycheck
• Taking on significant new expenses, like college tuition for your kids

Life insurance ladders can also help you taper coverage when needed, like when:

• Your kids become financially independent
• You finish paying your mortgage
• You lower your debt through debt consolidation or paying off obligations, like credit cards or student loans

Can you save money with the ladder strategy?

Saving money on life insurance over the years is one of the main reasons people choose to ladder their policies. To understand how laddering can help you cut costs, it helps to know how insurance companies price their policies.

Life insurance premiums are typically based on a few major factors:

• Your age. Life insurance goes up in price as you get older, anywhere from 8% to 10% per year. Laddering two policies at the same time while you’re young can be a cost-effective way to lock in coverage at lower rates, rather than waiting to buy when you’re older.

• Your health. Health issues can make getting covered more expensive or prevent you from qualifying at all for coverage. Laddering multiple policies early on in life can help you secure protection before potential health concerns come up.

• The term length. This refers to how long the policy covers you – the longer the term length, the more you pay. For example, 20 years of life insurance coverage is more expensive than 10. Buying multiple policies with varying term lengths lets you choose just the right length of coverage for different times in your life, so you’re not paying more than you need throughout the term.
• The coverage amount. Higher coverage amounts cost more: For example, a 30-year-old man could pay $22 per month for a $250,000, 20-year term life policy through eFinancial and $35 per month for a $500,000, 20-year term life policy. Depending on how much coverage you buy, that difference in cost can add up to thousands over the life of the policy. Laddering helps you increase or decrease your coverage over time, so that you’re only paying for a lot of coverage when you truly need it.

The main takeaway: Even if you need a significant amount of coverage at a certain time in life, like $500,000 or even $1 million, you often don’t need that much coverage for your entire lifetime. Tapering off coverage when it’s no longer needed can support your family’s overall financial strength by helping you save significantly on payments during your lifetime. Here’s what that looks like in action.

 

Examples of life insurance laddering

Depending on your situation and financial goals, you can ladder up or ladder down life insurance coverage as needed. Here’s how it works:

Buying Two Policies At the Same Time

Say you have a young child, and you just bought a house with a 30-year mortgage. You might buy two term life insurance laddered policies at the same time:

• A $250,000, 30-year policy to cover your mortgage
• A $250,000, 20-year policy to provide for your child until they’re grown

For the next 20 years, you’ll have $500,000 in life insurance coverage. After that, your coverage will go down to $250,000 for the final 10 years.

Here’s how the cost of each policy would stack up for a 30-year-old man in excellent health, using a sample policy available at eFinancial:

• Policy 1: $28.95 per month, or $10,422 in total payments over 30 years
• Policy 2: $21.75 per month, or $5,220 in total payments over 20 years

Compare that with the cost of a $500,000, 30-year policy, which is $49.15 per month, or $17,694 in total payments over 30 years. In this case, you could save over $2,000 by tapering off coverage when it’s no longer needed.

Adding a Policy Later

In some cases, it may be more helpful to establish a base amount of coverage and add to it later in life. Say you buy a $250,000, 30-year policy when you purchase your home. Fast-forward 10 years, and you’re expecting a child and want some additional protection. You add a second $250,000 life insurance policy to increase your coverage, so you end up with:

• Policy 1: $250,000 for 30 years, the same length as your mortgage
• Policy 2: $250,000 for 20 years, until your child is out on their own

You now have $500,000 in total protection for the next two decades while your child grows up. Since your life insurance premiums stay the same for the life of your policy, adding a second policy is cheaper than trying to increase the original one to $500,000. That would typically require you to reapply for life insurance coverage, which would increase your premiums.

Can I buy multiple life insurance policies?

Laddering with multiple life insurance policies is perfectly legal. You can even buy multiple policies from different insurance providers, but there are a few things to keep in mind.

When you apply for life insurance, the insurance company will ask about any other policies you have. Part of their fiduciary responsibility is to make sure that you’re taking out an appropriate amount of life insurance coverage, based on your income and age. In general, attempting to buy more than 20 to 30 times your income in coverage, even across multiple policies, can result in a denial.

Also, if you’re planning to ladder life insurance by buying two policies at the same time, it’s typically best to buy both from the same company. When you apply for a life insurance policy, all of your medical records are submitted by your life insurance company to the Medical Information Bureau (MIB). Applying for multiple policies at once can make it seem like you’re trying to purchase more insurance than you’re qualified to buy, resulting in a denial of coverage.

Is the life insurance ladder strategy right for me?

Laddering can be a cost-effective way to have your life insurance coverage evolve with you over time, but it’s not for everyone. Here are some of the upsides of laddering life insurance strategies:

• You can save money over the long run. Tapering off life insurance coverage when you don’t need as much can save you hundreds or even thousands of dollars over the course of your life. If you’re laddering a second policy on top of your existing policy later, buying a base level of life insurance coverage early in life can help you take advantage of rates when they’re at their lowest for you.
• Customizing around your needs and budget. Have your life plan all mapped out? If you have a good idea of what your finances will look like over time, then laddering policies can help your family lock in the right amount of coverage at the right price. This gives your family peace of mind that they’re protected, and they can put money saved toward other financial goals. Splitting into two life insurance policies also means that you can customize each one with life insurance riders as desired. These are optional add-ons for your policy you can use to gain extra protection in certain areas. For example, you may want to add a terminal illness rider, which pays out a portion of your coverage if you’re diagnosed with a terminal illness, just on the longer policy so it covers you later in life.

Here are a few of the potential downsides of laddering:

• Laddering can leave you without enough protection. Laddering requires you to have a pretty good idea of your financial responsibilities, but life doesn’t always work out that way. Life can be unpredictable. You might think that you only need 20 years of coverage, but then a surprise baby comes along. If you’re planning to add a second policy later, health issues could also crop up between now and then that could prevent you from getting covered. Since term life insurance is already affordable — it costs three times less than most people think — it’s worth it to some people to just lock in more protection for a full 30 years.
• Laddering can get complex for you and your beneficiaries. Life insurance is fairly simple to maintain, but two policies are more to keep up with than one. You need to remember to pay two bills and keep two policies up to date with your current beneficiaries. If the worst happens, your loved ones will also need to make claims on two policies, increasing the likelihood that one will get overlooked and go unclaimed. If you decide to ladder your life insurance, make sure to explain clearly to your beneficiaries how to find and access each one.

It’s best to talk to a professional about your goals, so consider consulting with a financial advisor. When you’re ready to buy, our eFinancial agents can also help explain your life insurance options and find the solution that’s best for you.

Still have questions?

We’re here to help. eFinancial works with top-rated insurance companies to help you find the right coverage for you and your family. Call us or start your quote online today.

 

At eFinancial, our goal is to make life insurance simple, affordable, and understandable for everyday families. This content is intended for educational purposes only. Each post is carefully fact-checked, reviewed and updated regularly to ensure the information is as relevant as possible.