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 does too. If you don’t need as much coverage as you did when you originally bought your policy, you will end up paying higher premiums for superfluous coverage. But if you need more coverage, you will end up paying higher premiums because the cost of buying life insurance increases as you age.

You don’t want to do that — which is where laddering your 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 to save money

The ladder strategy is designed according to a pretty basic principle: as you get older and pay down bills and increase your savings, your financial obligations decrease and you need less life insurance coverage. 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.

Laddering multiple life insurance policies so that they expire at different times makes sure that you’re only paying for the coverage you actually need and not the coverage you needed 10 or 20 years ago.

The cost of life insurance

Life insurance policies are priced according to three 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 health (a person with a complicated health history will have a more expensive policy than someone in good health)

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.

Example of 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 — by laddering three separate policies that equate to $1 million now and allowing them to taper off over time, you’re only paying the premiums for the $1 million policies 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).

The above rates are based on policies offered by Policygenius as of August 2020

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 consider the life insurance ladder strategy

If you have a clear understanding of what your financial future looks like, laddering your life insurance can save you a lot of money in the long-run. Because life insurance is cheaper when you’re younger, and presumably, in better health, laddering your policies means paying cheaper premiums than you’d pay if you bought a new policy when you’re older. 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, designing a ladder strategy necessitates a grasp of how much coverage you’ll need at different points in your life. 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 on these changes. It will both save you premiums and provide the proper amount of coverage when it is needed,” says Patrick Hanzel, Advanced Planning Specialist and Certified Financial Planner at Policygenius.

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. A financial adviser can work with you to determine your life insurance needs and how to best meet them.

Downsides of the life insurance ladder strategy

There are two main downsides to the ladder strategy: you may not have enough coverage if you end up needing more life insurance and it can get complicated for your beneficiaries.

You may end up without enough coverage

If your financial situation changes and you end up needing more life insurance coverage than you anticipated, you could end up paying for financial protection that doesn’t adequately match your needs. While you can likely buy more coverage, it’s going to be more expensive when you’re older.

If you have people that will be financially impacted by your death for the long-term, they’ll be better protected by a single life insurance policy that has a level coverage amount.

It’s complicated

Ladder strategies are inherently more complicated than a single life insurance policy. Not only do you need to shop for multiple policies, but you need to pay multiple bills and keep multiple policies updated with every big life change.

If you die, it also means that your lawyer or whoever else is managing your estate needs to file multiple death benefit claims and manage each policy’s payout as well. A ladder strategy requires a lot of organization and could create problems down the line for your family if it’s not properly managed.

That said, laddering your life insurance policies has the potential to save you a lot of money if you plan early enough and can anticipate what your expenditures 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.