You guy get older, you’ll often find yourself taking on more responsibilities.
For example, you may buy a home. Start a family. Take care of your aging parents.
As life changes, so does your need for life insurance.
Life insurance becomes more important, but also more expensive, as you get older. To combat this, you should consider using an insurance strategy called life insurance laddering.
What is Life Insurance Ladder Plan?
Life insurance laddering or a “ladder plan” happens when you buy more than one term life insurance policy. And all these policies have different end terms or expiration dates. The biggest advantage of this strategy is that you do not have to rely on a single policy for all their requirements.
Secondly, the life insurance laddering strategy allows you to get the best price on all the life insurance policies that they buy throughout your life.
This laddering strategy is similar to buying various certificates of deposits.
Now, why is Life Insurance Laddering a good idea?
Well, that’s because multiple life insurance policies with different end dates allows you to alter your coverage requirements based on their circumstances. For example, the number of people depending on you financially, and any outstanding loans and mortgages keep changing with time. This is where life insurance laddering with various term life insurance policies comes in handy.
What do you need to factor in before buying multiple life insurance policies?
Before buying multiple policies, consider your current and future expenses.
For example, when you are younger and without dependents, you may not need life insurance. When you get married and have kids, your financial needs will change. If you pass away, you will leave people back who are dependent on you for their financial needs. More loans and financial obligations may be added to your responsibilities over time.
You should make a list of all your debts, including those for your children’s future schooling and funeral expenses, to decide the amount of life insurance that will be required.
Think about factors like how long you want your assets to be last in the event of your death. Especially, in the case, your spouse does not earn and needs to stay at home for the children.
What does a life insurance ladder look like?
For example, assume that you are a married, 35 years old with 2 children. Now, you need to determine the living expenses of your family plus the mortgages/loans that you need to pay off.
Suppose you have estimated that for the next ten years, your total expenses will be around $1.5 million. After paying off all your loans and debts in these estimated ten years, $1 million will be enough for the financial survival of your family.
Over the next ten years, your children will have grown up and they will be on their own. So, your family’s financial needs will reduce by 50% to $500,000.
Now, considering all these plans, your life insurance ladder with three policies could look like this:
1. One term life insurance policy for 30 years for $500,000 in coverage
2. Another term life insurance policy for 20 years for $500,000 in coverage
3. And one term life insurance policy for 10 years for $500,000 in coverage
In this example, if you pass away in the first 10 years, your dependents will receive your death benefit of $1.5 million from all three policies. This amount will be sufficient for them to pay off all their loans and carry on with their lives.
On the other hand, if you pass away in the period between 10-20 years of this plan, the death benefit from your remaining two policies will be around $1 million. This amount will be sufficient for your family’s financial coverage.
Now, suppose you pass away in the period between 20 to 30 years, your death benefit from your one remaining policy will be $500,000. And this amount will easily suffice your family’s expenditure at that time.
With this type of life insurance plan, you are covering your financial needs if you pass away at different ages. At the end of the day, this is not a waste of money, but a relief for you and your family members.
How Life Insurance Laddering Saves You Money
This is another advantage of buying short-term life insurance policies. Multiple policies not only offer better coverage, but they also help you save on your money in premiums.
The yearly premium amount for the policies with a 10 to 20 years term period is going to be less than a single policy for 30 years, despite being of the same cost. This is because the shorter-term policies will end up sooner. As the policyholder, will still be you and in prime health, in most cases.
So, for example, a single policy for 30 years, worth $1.5 million is likely to have an annual premium of $2050 per annum.
On the other hand, if you buy three policies as we mentioned in the example case above, their premiums will look like this:
| Plan | Annual Premium |
| 1. One term life insurance policy for 30 years for $500,000 | $730 |
| 2. Another term life insurance policy for 20 years for $500,000 | $475 |
| 3. And one term life insurance policy for 10 years for $500,000 | $310 |
| TOTAL | $1,515 |
If you look at the total sum of annual premiums that you will be paying with three policies, it is less than having to pay for a single, longer-term policy. This is just a rough estimate, but this is enough to understand that buying multiple shorter-term life insurance policies is better. Similarly, once your short-term insurance expires, you will be done with it. You will no longer have to pay for those premiums.
Conclusion
While life insurance laddering has a lot of benefits, it is not the best strategy for everyone.
If you are young and need a $500,000 worth of life insurance policy, it may be better to buy a single one instead of laddering it out and buying multiple policies.
Similarly, if your financial situation remains unchanged for a longer period, then also buying multiple policies will not do much good for you.
In many cases, however, life insurance laddering can provide you more protection for a lower cost over the long run.