What Is Life Insurance Laddering?

How Do You Ladder Your Life Insurance Policies?

Term life insurance lasts for a certain amount of time, typically up to 30 years. Your beneficiaries receive a death benefit if you die during that period.

People often purchase term life insurance to protect their families during the years when their expenses are the most costly. For example, if you're married with a stay-at-home spouse, young children and a 30-year mortgage, you might buy a 30-year term life policy to replace your income, pay off the mortgage and finance your children's college tuition.

But you may not need that much coverage during all 30 years of the policy's term. Once children are grown and living independently, the expenses of raising them disappear. A spouse who returns to the workforce when the children get older won't need to replace as much of your income, and you may have paid off the mortgage long ago. The laddering strategy involves purchasing multiple life insurance policies with different terms in order to address the changing financial needs that different life stages bring.

To ladder life insurance, start by calculating the coverage you need and when you'll need it.

1. Add up your current debt (such as a mortgage, credit card debt and other loans) and when you expect the debt to be paid off.
2. Estimate how much income you'll need to replace, both now and in the future as your earning power grows.
3. Consider future expenses you may want to fund, such as your children's college tuition or weddings.
4. Subtract any liquid assets your survivors will be able to access at your death, such as emergency funds, savings accounts and Social Security benefits.

Based on this, you can select different terms and coverage amounts to meet your insurance needs and financial priorities. Here's how laddering might work for a married 35-year-old with two young children, a working spouse and a 30-year mortgage:

• A 10-year policy for $250,000 to pay for childcare so your spouse can keep working while the children are young.
• A 20-year policy for $500,000 to cover childrearing and college costs.
• A 30-year policy for $250,000 to pay off the mortgage.

This approach provides maximum coverage during the first 10 years, when your loved ones will have the most expenses. As your spouse's financial obligations shrink and their financial resources grow, the coverage decreases accordingly.

There's no limit on the number of life insurance policies one person can have. However, insurers do cap the dollar amount of coverage you can get. Coverage limits are based on several factors including how much coverage you already have, your current and projected income, your debts and your dependents.

What Is the Benefit of Life Insurance Laddering?

Life insurance premiums are generally lower when you're younger and less likely to die. As you get older, premiums typically rise even if you're in good health. In addition, longer-term policies cost more than shorter-term policies for the same amount of coverage. The laddering method can help you get the coverage you want without paying more than you need to.

Over time, life insurance laddering can save you a significant sum of money. Suppose you're a 35-year-old male nonsmoker in the "preferred" health category who wants to purchase $1 million in life insurance.

The average monthly premium for a 30-year, $1 million policy is $83.44, according to PolicyGenius. Over 30 years, you'll pay a total of $30,038.40 for your coverage.

Now suppose you use the ladder method and purchase $1 million worth of insurance in this form:

• 10-year policy for $250,000: $13.57 per month
• 20-year policy for $500,000: $30.14 per month
• 30-year policy for $250,000: $27.59 per month

The total cost ($71.30 per month) saves you $12.14 monthly or $145.68 annually compared to a single 30-year $1 million policy. These savings add up over time, especially as each policy ends and you can stop paying premiums.

Here's how the savings pan out:

• 10-year policy for $250,000: Total cost $1,628.40
• 20-year policy for $500,000: Total cost $7,233.60
• 30-year policy for $250,000: Total cost $9,932.40

• Total cost of 30-year, $1 million policy: $30,038.40
• Total cost of laddered policies: $18,798.40
• Total savings: $11,240.00

If you can't afford to buy as much life insurance as you need, even by laddering, purchase as much as your budget allows. It's better to have some coverage and affordable premiums than no protection at all. You can add coverage as you get older; just be aware it will probably cost more.

Is Life Insurance Laddering a Good Idea?

Life insurance laddering isn't for everyone. When does it make sense?

You might benefit from laddering life insurance if:

• You expect a significant increase in earning power. Are you on a solid career trajectory—for example, an associate at a law firm or other professional who can expect higher earnings every year? If so, buying insurance to replace your lifetime earnings now, when it's cheaper, can be beneficial.
• You have a lot of financial obligations. People with children, mortgages and other significant expenses are more likely to benefit from life insurance laddering than those with no dependents and few debts.

Laddering life insurance may not be ideal if:

• You're unsure of your future. If you're not sure you'll ever buy a home or have children or are undecided about staying in your current career, it's difficult to predict your financial needs 10, 20 or 30 years out.
• Your insurance needs aren't likely to change. A family with a special needs child who will require lifelong care wouldn't be a good candidate for laddering.
• You're uncomfortable with uncertainty. Laddering can be risky; no one can predict the future. Your loved ones may need more benefits later in life if a child becomes disabled or your spouse is laid off. Buying one long-term policy to cover all your financial needs can be worth the extra cost if it eases your mind.

Protecting Your Family's Future

Laddering life insurance relies on complex estimates of future resources, needs and goals. Expert advice from a financial planner or independent insurance broker can help you assess whether the ladder strategy makes sense for your situation.

There are other ways to lower insurance costs. In states where insurers can use credit-based insurance scores to determine premiums, having good credit could save you money. Although these credit scores differ from the scores lenders use, they're calculated using much of the same information. The same good habits that help improve your regular credit score—such as paying down debt and making on-time payments—can also boost your credit-based insurance score.