Our insurance needs vary throughout our lives.For example, if you start a family, your need for life insurance will increase dramatically with each new dependant. On the other hand, as large debts such as a mortgage are paid down, you will likely need less life insurance. So how do you ensure you have sufficient coverage at all times? More importantly, how do you ensure you’re not overpaying for coverage you don’t need?
Life insurance laddering may be your answer. Not restricted to the confines of insurance jargon, laddering lets you stagger multiple monetary vehicles—in this case, life insurance policies—to meet your coverage needs at specific periods in your life. Read on to get the inside scoop on whether life insurance laddering is a good strategy for you.
What Is Life Insurance Laddering?
Simply put, life insurance laddering involves buying multiple life insurance policies with different coverage amounts and durations. The aim is to have multiple staggered policies that add up to your desired coverage, rather than purchasing a single policy that covers the entire amount. Since each individual policy has an exclusive coverage period, you can purchase different policies to address specific protection needs.
With the laddering strategy, you can minimize costs and avoid overpaying for coverage you no longer need when your life changes.
How Life Insurance Laddering Works
The life insurance laddering strategy should give you extra coverage when you need it most and minimize coverage when your needs aren’t as significant. You can ladder policies in two ways:
- Purchase a base life insurance policy and add more term riders later. For instance, you can take out a life insurance policy early in your career and stack a 20-year term policy after another significant life event, such as buying a home.
- Purchase several individual life insurance policies with different coverage periods at the same time. For instance, you can buy one 10-year term policy, one 20-year term policy, and one 30-year term policy.
The insurance laddering strategy is an excellent option if you’re looking to better fit your insurance to your specific timelines and goals. You can buy a longer policy to cover your family and a shorter one to cover your mortgage. Usually, two smaller insurance policies will amount to a lower premium than a single 30-year policy that bundles all your coverage needs together.
Laddering is also a great way to extend the length of your coverage. When you purchase insurance in your early 20s, you’ve probably not factored in the kind of family life you want, such as where to live and the number of kids you’ll have. However, your life and priorities will change as you grow older, and stacking multiple life insurance policies may provide the flexibility to adapt coverage to your ever-changing needs.
Surprisingly, some policyholders choose the laddering strategy when they are looking to get the best of both worlds with whole life and term life insurance. Splitting coverage helps you strike a balance and enjoy the benefits of both term- and whole-life insurance—cheaper premiums and some amount of permanent coverage.
When Should You Consider Laddering?
Building a successful life insurance ladder requires you to go beyond the simple comparison shopping you’d do when buying a single policy. Obviously, it’s challenging to determine the right amount of coverage for each period, and you don’t want to put your family at risk. Before you even consider the ladder strategy, here’s some of the homework you’ll need to do:
- Estimate your expenses. To create a successful life insurance ladder, start by estimating your expenses for each new term of coverage. Think through what your expenses look like now, what they’ll look like if you get married, when you take out a mortgage, and when you retire. You may also want to consider how much debt you’ll carry at each stage of your life.
- Calculate your net worth. As difficult as this may seem, estimating how much money you can feasibly bring in during a specific coverage period will help you estimate the amount of insurance you need. You may need more insurance riders if you expect that your net worth will increase over time.
- Shop around. You’ll have multiple insurance bills to pay, so it’s best to start the journey with multiple quotes. You should also compare the total cost of a single policy with multiple-term policies to ensure you’re making savings.
You may have done your homework and feel ready for the laddering strategy, but having multiple life insurance policies may not seem to make much financial sense overall. Sure, you’ll shave some money off your premiums, but what will you give away in return? When exactly should you consider laddering? Here are some situations that make you an ideal candidate for holding multiple policies:
- A major life event. Getting married, buying a house, or having a kid are some life events that point you towards laddering insurance. Instead of increasing the limits of your existing life policy, you can purchase riders to cover the new financial obligations.
- Wanting to supplement your employer-sponsored coverage. Generally, employer-sponsored group life policies max out at relatively low amounts, around $50,000. You’ll want to buy a rider if your financial obligations exceed $50,000 and your budget allows for additional coverage.
- Different financial goals. Life insurance should replace your income when you die. However, you may consider laddering if you need to cover long-term care, protect a business, pay off debt, or plan for retirement.
- Wanting to work with multiple carriers. You may consider purchasing multiple policies from different insurance companies if you’re wary of relying on a single provider.
Pros and Cons of Life Insurance Laddering
Applying for a single life insurance policy shouldn’t be complicated, but juggling multiple policies with different coverage limits and periods can be confusing. Here are some benefits of the laddering strategy:
You May Save Some Money
One of the main reasons to ladder life insurance policies is saving money. But how so? According to the PolicyAdvisor online quote tool, a healthy 25-year-old man pays approximately $103.75 per month for a single 30-year insurance policy worth $1,500,000.
Now, if he ladders this into three 10-year policies worth $500,000 each, he pays $22.95 per month for each policy. The total cost of laddered policies is $68.85 per month, which is a significant reduction. He pockets savings worth $418.80 annually for choosing the ladder strategy.
Besides this, you’ll pay higher premiums if you purchase insurance when you’re older, keeping in mind that health conditions will bump up your rate. With goals that are properly spaced, you stand a higher chance of saving money with the ladder strategy.
It’s Easy to Adjust Coverage
The ladder strategy makes it easier to augment coverage instead of making changes to your existing policy. Some insurance carriers restrict your ability to increase the coverage limit or alter the term length of an existing policy. Instead, buying rider policies will not only let you extend coverage, but also cover any new priorities.
Separating Coverage Enhances Protection
A single life insurance policy may promise comprehensive coverage, but separating your coverage into a ladder provides more focused protection. You may structure and separate your life insurance into a mortgage policy, college policy, and retirement planning policy. This makes it easier to assess how much coverage you need for each goal and the most suitable term length.
Laddering isn’t without its downsides, though; some of the pitfalls to watch out for when laddering include:
You Have to Manage Multiple Payments
Spreading your coverage over the years may save you money, but you’ll need to stay on top of your monthly premium payments, which may have different due dates and amounts.
Carrier Restrictions Apply
Unfortunately, not all insurance carriers will let you apply for or hold multiple life insurance policies simultaneously. This may limit the insurance companies you can work with.
Perfectly Matched Coverage Isn’t Guaranteed
Life insurance laddering lets you adjust coverage easily, but there’s no guarantee that you’ll always have perfectly matched coverage. Policy term lengths and coverage increments will not always align with your financial obligations. For instance, a 10- or 15-year term insurance policy won’t work well if you have 13 years left on your mortgage.
How Much Life Insurance Do You Need?
You typically don’t need any life insurance if you have no dependents and enough cash to settle your final expenses. If you need life insurance, calculating your desired amount of coverage won’t be straightforward. You need to consider who you want to protect, how long they’ll need financial support, the amount of debt you carry, your savings, and your retirement plans—among other things.
Your age and responsibilities will also weigh in on your need for life insurance. Being overinsured may adversely affect your budget and endanger your long-term financial goals, just as much as being underinsured will, so you must strike the perfect balance. A good rule of thumb to get a ballpark figure for your life insurance is to multiply your annual gross income by 10 to 15. Don’t rely on your employer-sponsored life insurance plan, since it may only be worth one year’s salary.
If you can’t harmonize your financial obligations, sources of income, and cash outflows (expenses), you can leverage an online life insurance calculator. By answering a few questions, you’ll have an idea of how much insurance you need.
Is Laddering Cheaper Than a Single Policy?
Laddering is the subject of much attention, because of the dictum that it’s cheaper than a single policy—which is true, at least in some instances.
You’ll probably lock in a lower rate for your coverage dollars if you purchase a single policy when you’re still young and healthy. On the flip side, you could end up overpaying for coverage you don’t need at all.
Laddering policies may attract higher premiums when you buy policies in your 40s than in your 20s. However, the savings you rack up in premiums may well make up the difference. Alternatively, when you buy several policies at a young age, some may max out when your need for specific coverage ends, taking away the premiums.
For sure, a well-structured ladder strategy may help you save money and provide an organized sense of what each coverage should protect. Should rates go up due to a limited choice of providers, or you end up paying more for buying a policy when you’re older, the cost benefits may cancel out or even incline to the single-policy approach.
Conclusion and Recommendations
The need to ladder life insurance largely depends on an individual’s future plans. For most policyholders, expenses decrease as the years go by, and their coverage needs may also follow suit. For instance, once your children are financially independent, the amount of coverage you’ll need will be a lot less than before.
Life insurance ladders are a great way to make sure you’re spending the least amount of money possible to insure yourself at different points in the future, and offer lots of options as the unknowns of our lives unfold.