Cost & Coverage
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By stacking multiple policies, you can taper your coverage and save on premiums.
For many people, the amount of life insurance protection they need throughout their lives varies.
Many life insurance policies allow you to adjust your death benefit amount while your policy is active, but another way to ensure you’re only paying for coverage you need is by undertaking a strategy called the ladder strategy or the laddering strategy.
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.
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.
Laddering multiple life insurance policies on top of each other so that they expire at different times leaves you only with the coverage you need, keeping your premium payments lower.
Life insurance policies are priced according to three major variables:
The ladder strategy takes advantage of the first two variables to keep premium costs low by ensuring that you’re are only ever paying for the amount of life insurance you need, and it takes advantage of the third variable by locking in low rates for each life insurance policy when you’re young and healthy.
Here’s an example of the ladder strategy in action (and see below for a visual representation of the strategy).
Pete is a 36-year-old male looking for $1 million of coverage for 30 years.
For Pete, a healthy 36-year old male, a 30-year term $1 million life insurance policy would cost $75.91 per month. In total, Pete would spend $27,327.60 on this policy.
However, Pete doesn’t need $1 million of coverage for the entire 30 years. His long-term goals include aggressively saving for retirement and his kid’s college education, as well as paying off his mortgage within the next 25 years.
So instead of buying a single policy, Pete instead designs a ladder strategy with the help of his life insurance agent. Pete buys three separate policies:
Pete starts with a total of $1 million in term insurance coverage (Policy 1, Policy 2, and Policy 3). For the first 10-year period, Pete will be paying $53.01/mo. for all three policies (Policy 1, Policy 2, and Policy 3).
After 10 years, Policy 1 expires and he is left with $500,000 in coverage (Policy 2 and Policy 3). This matches his financial plan of having less debt and more savings over time. For this second 10-year period, Pete will be paying $38.25/mo. for two policies (Policy 2 and Policy 3).
After another 10 years – 20 years in total from when he first bought his policies – his 20-year term policy (Policy 2) expires. Pete is left with just a single $200,000 policy (Policy 3) that will help his surviving spouse pay off their remaining mortgage and complete her retirement savings, as well as giving her some additional money for funeral and living expenses. Pete will be paying $21.56/mo. for Policy 3.
The use of a ladder strategy has a radical effect on how much Pete is going to pay for term life insurance over the next 30 years.
In total, Pete will pay just $13,538.40 in premiums for the three policies using the ladder strategy.
Compared to the $27,327.60 he’d pay for a 30-year life insurance policy for $1 million ($75.91/mo), Pete is saving $13,789.20 – just over 50%.
Not everyone will save 50% with a ladder strategy, but building a ladder strategy is a very effective way to lower the cost of your life insurance over time, and for many people, it’s at least worth pricing out.
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If you’re applying for life insurance when you’re young and healthy, your rates may be low enough that it might not make sense for you to ladder your policies; the savings may not be worth complication, or the lowered benefit as you age.
But if you have a complicated health history or are an older life insurance shopper, you may want to look into the ladder strategy as a way of lowering your premiums.
If you’re turned off by the price of your life insurance policy – for example, if you need a large amount of coverage or if you have health issues that are inflating the cost – a ladder strategy can be one of the best ways to reduce the amount you’re paying for coverage.
When designing your own ladder strategy, the most important thing to do is to get a grasp of how much coverage you’ll need at different points in your life.
Think about some of the major reasons you’re purchasing life insurance coverage – pay off mortgage, send kids to college – and think about what the status of those financial goals will be in 10 and 20 years’ time. A financial planner can also help you do this.
There are two main downsides to the ladder strategy: it may leave you without enough coverage later in life and it’s complicated.
There is also the chance that your financial situation changes, and that your ladder strategy no longer matches up with what you thought your financial situation was going to be. You can buy additional coverage if that turns out to be true for you, but your rates will be higher if you apply when you’re older.
Ladder strategies are inherently more complicated than just buying a single policy. Not only do you need to shop for multiple policies, but you need to pay multiple bills, keep multiple sets of paperwork, and potentially keep multiple companies updated with new beneficiaries.
If you do happen to die, it also means that your lawyer or whoever else is managing your estate needs to send multiple copies of your death certificate. If you’re an unorganized person, at least when it comes to your legacy plan, a ladder strategy could create problems down the line for your family.
That said, laddering your life insurance policies has the potential to save you a lot of money, and a Policygenius agent can help design your ladder strategy andapply for the life insurance policies to make it happen so you’re not doing it on your own.
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