Life Insurance Ladders: Saving with Laddering

Would you like to save money while enjoying good life insurance coverage? If so, you should consider a laddering strategy.

This technique allows you to hold multiple policies at the same time, so that one covers what another does not. This way, you can obtain first-rate coverage at a reduced cost.

In this article, we will explain what laddering is and why it might be right for you. Keep reading to find out how you can use laddering to save money on your life insurance.

Life Insurance Ladders: Article Contents

Saving with Life Insurance: It Can Be Done!

What is Life Insurance Laddering?

Problems with Laddering

Saving with Life Insurance: It Can Be Done!

Many people think that good life insurance has to be expensive. In general, this is a misconception, because you can save on your life insurance and have great coverage at the same time. It’s just a question of approaching life insurance intelligently, reviewing your options, and designing a strategy, such as a life insurance ladder.

Sometimes, saving on life insurance is as easy as purchasing it while you’re still young and your life expectancy is high. Or as easy as taking better care of yourself: quitting smoking, losing weight, improving your health, avoiding dangerous habits or hobbies... You can also take advantage of any discounts insurers offer on your coverage, or on coverage through group insurance, which is less expensive than personal insurance.

As we have seen, there are many ways to save on life insurance. But the most clever option is to plan a good strategy that guarantees full coverage with substantial payouts at affordable prices from the very start. To design such a strategy, we recommend that you consult an expert in addition to reviewing the information provided in this article.

Among the many attractive design options is insurance laddering. This is a great way to save, but--as always when purchasing life insurance--you should ask yourself two important questions: What coverage do I need now, and what coverage will I need in 20, 30, or 40 years? Long-term needs often vary and may be lower than initially thought. This is because family situations change: children grow up and become independent, and your loss will no longer financially impact them. As such, the insurance you purchased in the past might offer unnecessarily high coverage, resulting in you paying more than you need. Or the opposite: you need more coverage and have a product that doesn’t offer the payout your family will need once you’re gone.

What is Life Insurance Laddering?

Laddering is a great way to guarantee that you always have the best coverage at the best possible price. It is based on the principle of ladder rungs: each one covers a part of the ladder, equivalent to a specific time or need. Separately, these policies may be insufficient, but together they form a coordinated unit with a clear purpose.

In practice, this strategy consists of purchasing various policies that are similar but have different features. Typically, people use term life insurance, which has a set duration: 5, 10, 15, 20, 25, or 30 years. Term insurance is less expensive due to its limited duration: insurers take on less risk and can offer better premiums along with good payouts.

Term insurance also has another big advantage: as the risks are lower, it’s easier to access. The term life insurance qualification process is one of the easiest ones out there, and is much simpler than qualifying for permanent life insurance.

For this reason, laddering strategies are based on term insurance. Here are the basic concepts involved in laddering:

• Calculate how much you need. If you will need less coverage in the long term, it’s a great idea to ladder.
• Purchase multiple overlapping term policies. The idea is to create a term ladder. For example, if your short-term needs are greater, purchase a 10-year term policy with good coverage: $500,000, for example.
  Then, purchase another 20-year policy with intermediate coverage (around $300,000) and a third 30-year policy with lower coverage based on what you’ll need at that time--perhaps $200,000.
  With its lower coverage, this insurance will be much cheaper despite its duration. In the first few years, this will add up to $1 million in coverage. This means that if you die before the 10-year policy expires, your payout will total $1 million. It will then decrease as the policies expire.
• Lower premiums. If you compare this to the cost of monthly premiums for a 30-year life insurance policy with $1 million in coverage, you’ll realize that it’s much cheaper to build the insurance ladder with lower premiums that we just described.
• Significant savings. These monthly savings will amount to a significant cache of money after 30 years. For example, for stacked coverage of $1 million ($500,000 on the first rung, $300,000 on the second and $200,000 on the third), you can save around $13,000 over three decades.

Another interesting combination is purchasing an inexpensive whole life (also known as ordinary or traditional) policy with low coverage. This product will provide long-term protection (unlimited protection, in fact, up to the death of the insured), while more immediate periods can be covered by short-term term policies, as in the previous example. The advantage of this laddering strategy that combines term and permanent insurance is that you will always have a valid policy, which will guarantee a payout. What’s more, permanent insurance generates cash value, which over the long term is another form of savings. In exchange, the price of the premiums may be higher, because permanent insurance is more expensive. It is also more difficult to obtain, due to its demanding qualification process.

There is one more factor that can spare you from the arduous permanent insurance qualification process: at any point, you can convert your term insurance into permanent insurance--perhaps into a traditional life insurance policy that will form part of your insurance ladder.

Problems with Laddering

While life insurance laddering might seem like the perfect solution to save, you should keep in mind the following drawbacks:

• More complicated to manage. Purchasing a single policy that you can set aside and not worry about is not the same as having multiple policies with developments, expiration dates, and specifications that need constant monitoring. You will also need to explain these intricate details to your beneficiaries, because they are the ones who will have to go through the steps to collect the payout.
• More fees. There are always some fees associated with a policy. Commissions, broker fees, and other fixed costs will logically multiply when you have more than one policy.
• Inflation. Remember that, due to inflation, what may seem like a huge sum today might not be so large in 30 years. Make sure you calculate how much more you will need when this time comes.
• Life changes. As no one knows what the future will bring, your plans might not match up with reality: after 30 years, your family could still heavily depend on your income. To guarantee them coverage in this situation, it’s best to use a combined laddering strategy that incorporates a permanent policy with various term ones, as seen above.

As you can see, there’s a lot to consider when designing a laddering strategy to save money on your life insurance. This is why we recommend that you consult an insurance agent. He or she can help you choose the best policies to combine in your strategy.

You should also remember that laddering is not for everyone. If you’re not sure what your family’s long-term needs will be, it might be best to opt for a more standard life insurance formula.