Laddering Life insurance is a method of staggering your life insurance policy terms and coverage amounts so that they cover various financial obligations over periods of time.
Once you ladder life insurance policies, you can account for fluctuating needs in the future so you have the most coverage when you need it, with coverage decreasing as your needs diminish.
See the following section and find out more about Life Insurance Ladder Strategy.
What is Life Insurance Strategy/ Laddering Life Insurance
The laddering life insurance/ life insurance strategy is to buy multiple-term life insurance policies with differing expiration dates to match your expected financial needs as they change with time.
In a ladder, you have many policies that expire in different years as your life insurance payout needs to reduce in later years.
Mostly, this is better than buying one large policy that tries to match the timeframe of your longest debt. Laddering life insurance is a way to adapt life insurance coverage as your life turns over.
In a life insurance ladder, you have a policy for each major financial obligation, with different coverage endpoints so that you’re not paying for coverage long after your need for it is gone. This also typically reduces the total amount you pay.
For example, you may have these debts and financial needs that fluctuate during your life:
- Childcare costs
- Children’s current education costs
- Children’s future education costs
- Mortgage payments
- Income for surviving spouse
- Final expenses
If you have a mortgage, paying for a private high school education, saving for college, and want to set up an income for your spouse if you were to die.
You need more life insurance than if you simply wanted a payout to cover final expenses. When you have multiple life insurance needs, you may want to ladder policies now and have fewer life insurance policies in a decade or two.
Method of Laddering Life Insurance
Laddering life insurance simply means buying multiple-term policies with differing expiration dates. For instance, when you buy:
- A $250,000 10-year term life policy
- A $250,000 20-year term life policy
- A $250,000 30-year term life policy
If you were to buy all three policies at the same time, the above example means you would have $750,000 in term-life coverage for the first 10 years, $500,000 in term life coverage for the middle 10 years, and $250,000 in term life coverage for the final 10 years.
Also, you could stagger the three policies, so you have a 10-year policy now, add a 20-year policy in a few years, and then a 30-year policy further down the road.
Why should you ladder life insurance policies? You may want more coverage for the first 10 years because that’s when you have the largest life insurance needs, such as paying a mortgage and saving for your children’s future education needs.
If you plan on paying off your mortgage in a few years, you won’t need to factor in those costs for your long-term life insurance needs. The same goes for saving for a child’s education. If your child is a teenager, you might not need to worry about education costs in a decade.
You might want just enough coverage to handle final expenses and to provide an income for your spouse when you die.
How to Save Money with a Life Insurance Ladder
You can save on life insurance premiums by going with multiple term life insurance policies featuring varied lengths rather than buying one sizable 30-year term life insurance policy.
See an example below using the average of the five cheapest term life insurance quotes we found online for a 40-year-old nonsmoking male with average health.
Life Insurance Ladder vs. Buying One Large 30-Year Term Life Insurance Policy
|Policy||Average monthly cost|
|Monthly total for first 10 years||$63|
|Monthly total for the second 10 years||$49|
|Monthly total for the third 10 years||$30|
|Monthly total for one 30-year, $750,000 term policy||$69|
Looking at the table above, laddering three different $250,000 term life policies would cost less per month than buying one $750,000 30-year policy.
You would sacrifice the death benefit by laddering policies in the future, but you’d save money throughout the duration of the term life policies.
Should You Ladder Life Insurance?
All individual financial circumstances are unique. Life insurance ladders are a way to make sure you’re spending the least amount of money to fully insure yourself at different points in the future.
However, laddering may not fit your needs. You may decide that a permanent life insurance policy such as a whole life insurance policy or a long term life policy makes more sense for you.
How Much Life Insurance Should I Buy?
Since there is no exact rule or amount for how much life insurance you need, some simple recommendations use between five and 15 times your annual income for life insurance coverage. But rules that involve multiplying income tend to be too simplistic.
There’s the DIME Rule (Debt & Final Expenses, Income, Mortgage, Education). This rule says you should add up these expenses to calculate your life insurance needs:
- Debt (include funeral expenses)
- Income (multiply your annual income by the number of years you want to provide it, such as 10 or 20 years)
- Mortgage (the balance)
- Education (such as private school and college with housing and books)
For a quick and easy estimate of how much life insurance you need, try using the life insurance calculator. Some of the factors to consider when determining how much life insurance you need include: