I know what you’re thinking. You want to sit down, grab a cup of coffee and have a relaxing, care-free conversation about…life insurance.
WAIT! COME BACK!
Let’s try this another way…
There are certain ways you can leverage the life insurance system to your benefit. One of those ways is by using the life insurance laddering strategy. By using laddering, you may end up saving a substantial amount of money. In other words…
Would you like a free trip to Tahiti?
“Can I get ‘YES!’ for $200 Alex?!”
While it’s not “free”, you will be able to afford it with the amount you save on your life insurance.
So saddle up for Tahiti friends! Let’s see what laddering is all about…
What Is Life Insurance Laddering?
It’s like getting your breakfast off the “a la carte” menu bit by bit. The more full you get, the less food you buy.
Life insurance laddering is when an individual buys multiple term life insurance policies, all with varied term lengths and coverage amounts, to address their life insurance needs.
Let’s break that down
Individuals can buy life insurance for various term lengths, but the most common are 10-year, 20-year and 30-year terms. This means an individual pays a monthly fee for this predetermined amount of time and gets a set amount of coverage.
The catch? Longer-term, lower-coverage life insurance can actually be more expensive than short-term, high-coverage insurance. This is because (get ready for a fun fact to uncork at your next dinner party) the chances of you dying actually increase as you get older!
What does this mean? The older you are, the more likely it becomes the insurance company will have to pay out your claim, making its riskier for them and more expensive for you.
Even so, most people go with a traditional 30-year term life insurance policy that offers the same coverage for every year the policy is in effect, and pay the same amount every month for 30 years.
Sound like the American Dream?
Not quite. You probably don’t need the same coverage when you’re 65 that you did when you were 35, but you’re still paying for it.
Coverage Needs Change over time
If you were to suddenly disappear off the face of the earth, life insurance exists to help your family pay for what you currently pay for. So if you are paying the mortgage and suddenly cannot pay that any longer, life insurance takes over to ensure your family doesn’t have to suddenly sell the house you’ve lived in for 10 years.
What else does life insurance cover?
- Monthly bills & expenses
- Co-signed debts
- Child/dependent care
- College tuition
- End of life expenses
So if you buy a 30-year life insurance policy when you’re 30 years old that covers your children’s college tuition, and their tuition is paid off by the time you’re 50, you’re paying for a policy that covers college tuition for ten years after you no longer need it.
That is not how you get to Tahiti my friends!
How the life insurance laddering strategy saves money
This is where life insurance laddering comes in. When you ladder term life insurance, you’re buying short-term life insurance to cover current risks. Things such as your children’s tuition for the next 10 years. And after that 10 years is up, maybe you want life insurance that simply covers things like a mortgage and car payment.
After these bigger expenses are paid off and you’ve got a good start on your retirement fund, perhaps you only want coverage that takes care of end of life expenses and helps your partner complete their retirement savings for the final 10 years of your plan. This is the essence of life insurance laddering.
Let’s look at a Laddering example
Maria is in her mid-30’s with two children and has had mild health problems in the past. She wants $1 million of coverage for the next 30 years.
Traditional Policy Strategy
If Maria buys a traditional 30-year term life insurance policy, she’s looking at $73/month.
$73 per month doesn’t sound too bad for $1 million you may say.
And you may be right. But if you can get $1 million for half that price, wouldn’t you do it?
Here’s what Maria does. Instead of buying one policy, Maria uses the life insurance ladder strategy and buys three.
- Policy A: 10-year $600,000 policy ($16/month)
- Policy B: 20-year $300,00 policy ($18/month)
- Policy C: 30-year $100,000 policy ($15/month)
How Laddering Life Insurance Works
For the first 10 years of the policy, Maria wants solid coverage as she is a single mother with two children who are about to start college. Thus for the first 10 years of her 30-year plan, she will pay for all 3 plans at $49/month.
For the second 10 years of the policy, Maria’s children have graduated and now have jobs which means they cover their student debt. They also now have jobs to support themselves in the case of Maria’s death, so she doesn’t need quite as much coverage as she did in the first 10 years of her plan. Thus, Maria pays for only two plans for the next 10 years, spending $33/month.
In the last 30 years of her plan, Maria now needs very little coverage. She only really needs to cover the last few years of her mortgage and her end of life expenses. Thus she only pays for one policy per month, which is the policy she has been paying for during the preceding 20 years at $15/month.
ladder term life insurance Strategy
Let’s compare the two strategies and see how much you can save with laddering term life insurance.
Single Term Life Policy
Under the traditional 30-year term life insurance policy, Maria would have paid $26,280 over 30 years.
With the laddering strategy? $11,640.
That is a savings of $14,640, over 50%.
An extra $14,640?
THAT is how you get to Tahiti my friends!
Total Savings Over 30 Years
OK, Hold on.
We’ve all heard tales of people jumping for joy and running ecstatically through the streets after reading pieces which examine nuanced aspects of term life insurance policies, haven’t we? But we ask you to refrain from that until you read below.
The Downsides To Life Insurance Laddering
First, laddering is complicated. It requires drawing out a fairly accurate 30-year plan for you and your family, and assumes no significant changes in that plan. If you purchase your plans from multiple companies, it means procuring multiple death certificates and dealing with multiple life insurance companies instead of one.
Second, life is constantly in flux, and your situation may change. Maybe you got an unexpected raise (time for that new flat screen!), maybe you are suddenly diagnosed with an unexpected illness, or maybe you find yourself supporting someone in an alcohol rehab center during your later years. All of these significantly change your overall costs and liabilities you may leave behind.
Those who are very young and fit may not see significant savings from laddering, and the hassle may just not be worth it.
The bottom line?
Life is unpredictable, and laddering life insurance can potentially make your life insurance policy less adaptable.
In other words…
The juice may not be worth the squeeze.
Laddering may also be risky if you plan on significantly improving your standard of living later in life. If you plan to take out a mortgage to buy a second home at 65 on the beach (DON’T DO THIS), it would leave your spouse or loved ones with a significant debt burden if you pass before paying it off. In this case laddering would not be an ideal choice.
So, let’s sum all of this up.
Talk to an independent insurance agent who knows the ins and outs of the life insurance market to help you find the right policy for you.
Doing your research is great, but everyone’s situation is different. Sitting down with an expert and explaining your situation will help you determine whether or not life insurance laddering is the right fit for you.
And who knows? If everything works out you might just be able to squeeze a vacation in paradise out of it.