The ladder strategy allows you to pay just for the amount of life insurance coverage you need at each stage of your life. You stack multiple term life insurance policies with different coverage amounts and term lengths that will expire as your financial obligations decrease.
Your life insurance needs change as you get older and you have fewer financial responsibilities — for example, you pay off your mortgage or your children graduate college — so the amount of life insurance coverage you need might change over time. And because we all become more expensive to insure as we age, laddering multiple life policies early on allows you to secure the right financial protection for your family while locking in the lowest rates.
How does the ladder strategy work?
Laddering life insurance means taking out multiple insurance policies with different coverage amounts and term lengths. You can intentionally stack these policies so you have the right amount of financial protection across different stages of your life.
The ladder approach applies only to term life insurance, which lasts for a set period of time, usually between 10 and 30 years, and then expires. Term life is easy to manage, doesn’t have any complex tax restrictions or limitations, and is affordable, which is why it can help you save money as part of the ladder strategy.
“The most effective way to ladder policies is to determine what you want to protect and why,” says Bradley Hilton, certified financial planner and founder of Sonos Financial Planning. “If you know your financial needs will decrease, it can be a good strategy.”
Example of life insurance ladder strategy
If you need $1 million in life insurance over your lifetime, that doesn’t mean you need $1 million in coverage at every point in your life. Your expenses are higher when you’re younger and have more financial responsibilities. As you get older and pay off some initial financial obligations, like a mortgage or your children’s college tuition, your coverage needs are likely to be lower.
By laddering three separate term life policies that equate to $1 million now and allowing them to taper off over time, you’re only paying the premiums for each policy when you actually need the coverage.
Here’s how the ladder strategy would work if you were a 35-year-old non-smoking male in good health based on these three policies:
Policy 1: A 10-year term life policy with a $500,000 payout
Policy 2: A 20-year term life policy with a $300,000 payout
Policy 3: A 30-year term life policy with a $200,000 payout
You have a total of $1 million in life insurance now, and as you get older and need less protection, your coverage amount decreases.
The example below illustrates what that means for your finances — and how much you’d end up saving.
Even when all three original policies become active simultaneously, the monthly cost of all three premiums combined is cheaper than the single monthly premium you’d have to pay for a $1 million policy with the same duration.
Laddered life insurance vs. a 30-year-term life policy
Below is an example of the difference in premiums between laddered policies and one 30-year term life policy with the same total coverage amount.
Laddered life insurance monthly payments for $1 million total coverage
$500,000 policy for 10 years
$300,000 policy for 20 years
$200,000 policy for 30 years
30-year term life insurance monthly payments for $1 million total coverage
$1,000,000 policy for 30 years
How much can you save with a life insurance ladder strategy?
As the illustrated example shows, the ladder strategy can save you over 50% on your term life insurance by staggering multiple policies rather than buying one large policy.
This doesn’t mean that everyone will save 50% with a ladder strategy — your premiums will vary depending on age, gender, insurer, health, hobbies, and other factors that make up your unique profile.
But as you can see from the example above, building a ladder strategy is an effective way to lower the cost of your life insurance over time if you need a lot of coverage now, but anticipate having fewer needs over time.
Why do you save money using the life insurance ladder strategy?
Life insurance policies are priced according to a few major variables:
How long the policy lasts: Longer terms are more expensive. A 20-year term policy costs more than a 10-year term policy.
How much coverage you want: The more coverage you have, the more it will cost. A policy with a $750,000 coverage amount costs hundreds more than one with a $500,000 coverage amount over its lifetime.
Your background: A person with a complicated health history will have a more expensive policy than someone without any health conditions, while younger applicants pay less than older applicants.
The ladder approach takes advantage of the first two variables by tapering off certain coverages when they’re no longer needed. Finally, it also takes advantage of the third variable by locking in low rates for each life insurance policy when you’re younger and healthier.
How to decide if the life insurance ladder strategy works for you
If you’re considering the ladder strategy, start by having a clear picture of your life insurance needs.
The amount of life insurance you need will depend on several factors, including if you have a spouse and the kind of financial contributions they make to your household, if you have dependents or plan to have children one day, and if you have any major liabilities — for example, a mortgage or student loans.
Most experts typically recommend anywhere between 10 to 15 times your annual income in coverage. We can also do the math for you. Use our life insurance coverage calculator to get an estimate of how much coverage you need.
Typically, it’s a good idea to review your life insurance coverage at major life milestones, such as getting married, having a child, buying a house, or even switching jobs. The amount of coverage you need now will likely change in the future.
“The goal is that over time your assets will increase and debts will decrease,” says Patrick Hanzel, advanced planning manager and certified financial planner at Policygenius. “Laddering is a good solution when there is a clear timeline for these changes. It will both save you premiums and provide the proper amount of coverage when it is needed.”
If, on the other hand, you’re unsure of what your finances are going to look like in the future, or if you already know your financial obligations won’t change over time, getting multiple life insurance policies isn’t a cost-effective financial strategy.
How to pick the right life insurance ladder strategy
Each policy comes with administrative fees, so stacking more than two or three policies can become more expensive and cumbersome in the long run. Working with a financial advisor can ensure that you set up a life insurance ladder plan that saves you money and provides the coverage you need at different stages of your life.
A Policygenius expert can help you evaluate how much life insurance you need, design your ladder strategy, or apply for one single life insurance policy to get you and your loved ones enough coverage. At Policygenius, our brokers are licensed in all 50 states and can walk you through the entire life insurance buying process while offering transparent, unbiased advice tailored to your personal situation.