How to save money on life insurance with the ladder strategy

As you reach major milestones in life, the amount of life insurance protection you need changes. If you don’t need as much coverage as you did when you originally bought your policy, you will end up paying premiums unnecessarily. And if you need more coverage, you will end up paying higher premiums because the cost of buying life insurance increases as you age.

Most of the time, the amount of coverage you need decreases. But you don’t want to pay more for coverage — which is where laddering life insurance policies comes in. With the ladder strategy, you stack — or ladder — multiple term life insurance policies so that they expire over time, ensuring that you are only paying for the coverage you need while still maintaining adequate financial protection in the long term.

How the life insurance ladder strategy works

At first, you may need a larger death benefit to cover multiple facets of your life, from caring for your children to ensuring your student loan debts don’t fall on loved ones.

But as time goes on and your children grow up or your debts are paid off, you may only need enough coverage to cover a few outstanding expenses, like a mortgage or final medical bills. The ladder strategy is designed according to this principle: as you get older, pay down bills, and increase your savings, your financial obligations decrease and you don't need as much life insurance coverage. So, you ladder multiple life insurance policies so that they expire at different times. This ensures that you’re only paying for the coverage you actually need and not the coverage you needed 10 or 20 years ago.

How laddering life insurance saves you money

Life insurance policies are priced according to a few major variables:

• How long the policy lasts: a 20-year term policy costs more than a 10-year term policy

• How much coverage you want: a $750,000 policy costs hundreds more than $500,000 over the course of the policy

• Your background: a person with a complicated health history will have a more expensive policy than someone in good health, while younger applicants pay less than older applicants.

The ladder strategy takes advantage of the first two variables by tapering off certain coverage when it's no longer needed and it takes advantage of the third variable by locking in low rates for each life insurance policy when you’re young and healthy.

The ladder strategy in action

If you need $1 million in life insurance coverage 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 — by laddering three separate term policies that equate to $1 million now and allowing them to taper off over time, you’re only paying the premiums when you actually need the coverage.

Here’s how it would work if you were a 36-year-old male based on these three policies:

• Policy 1: A 10-year policy of $500,000

• Policy 2: A 20-year policy of $300,000

• Policy 3: A 30-year policy of $200,000

You have a total of $1 million in coverage now, and as you get older and need less coverage, your coverage amount decreases. The images below demonstrate what that means for your finances (and how much you’d end up saving).

Not 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 a very effective way to lower the cost of your life insurance over time if you need a lot of coverage now, but won’t necessarily need it later.

Who should ladder their life insurance policies

Laddering life insurance policies is a good financial strategy if you know what your future expenses entail — from mortgages to how many kids you’ll need to provide for. By laddering life insurance, you can save a lot of money in the long run — if you get a term policy to cover dependent care now and buy a policy with just enough coverage to cover small expenses later on, even that smaller amount of coverage will be a lot costlier.

However, if you’re unsure of what your finances are going to look like in the future, getting multiple life insurance policies isn’t a cost-effective financial strategy.

"Financial obligations and situations as a whole can, and often do, change over time. The goal is that over time your assets will increase and debts will decrease. 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,” says Patrick Hanzel, Advanced Planning Team Lead and certified financial planner at Policygenius.

Laddering your life insurance policies has the potential to save you a lot of money if you can anticipate what your financial future will look like for the next 20 to 30 years. A Policygenius agent can help you evaluate your life insurance needs, design your ladder strategy, or apply for one single life insurance policy to get you and your loved ones enough coverage.