What Is a Life Insurance Ladder?
A life insurance ladder refers to buying several term life insurance policies that have different expiration dates to optimize the overall cost of your life insurance.
Published February 6th, 2021
Have you ever wondered how to buy exactly the right amount of term life insurance coverage? It’s a fact of life that our financial obligations decrease as we age. That means if you purchase a 30-year policy, for example, at a fixed premium rate and for the same amount of coverage for the entire term, you’re actually over-paying for insurance in those later years of the policy.
What if there were a way to gradually decrease the amount of term coverage as time passes? There is such a strategy. It’s known as a life insurance ladder.
A life insurance ladder is an ideal way to arrange coverage so that you never over-pay for the actual amount of protection you need.
How Ladders Work
Ladders are ingenious arrangements based on simple mathematics. The insured buys more than one term life policy, typically three, of varying term lengths. The first might expire in 10 years, the second in 20, and the third in 30. That way, premiums are higher at first and then decrease every ten years, leaving you with less coverage but also with less expense.
Insurance ladders are ideal for staggering your coverage in a decreasing amount over time. But they also let you lock in rates based on your current state of health and your age. That means you don’t get stuck paying higher rates for the later years of coverage. All rates get locked in the moment you buy your ladder policies.
What are the Benefits of Ladder Strategies?
There are two key benefits of a life insurance ladder.
First, you actually get the chance to create a tailor-made life insurance arrangement simply by purchasing several policies at the same time.
Second, you get the best pricing because of the aforementioned rate lock-in feature. There’s no other simple, inexpensive way to give yourself tiered, decreasing insurance protection as you age. The tailor-made aspect along with rate lock-in can save you as much as 50 percent in the long run.
An Example of a Ladder
Say you want $1 million in term life insurance for the next 10 years, $500,000 for the following 10 years, and $250,000 for the last 10 years of the ladder.
The way to set it up is to purchase three policies of those amounts at the same time. Here’s what you’d do: purchase a $500,000 term policy that lasts 10 years, a $250,000 policy that lasts 20 years, and another $250,000 policy that lasts 30 years.
* Monthly premiums as average lowest estimated rate for a 30-year old male in good health (Source: Quotacy)
As shown in the graph above, this laddering strategy gives you a total death benefit of $1M in the first 10 years, then $500,000 for the following 10 years, and $250,000 for the last 10 years, at decreasing yearly costs.
The total cost of this life insurance scheme is $13,560 over 30 years.
The savings are quite significant, compared to a single 30-year life insurance policy with $1M death benefit:
Total cost = $67* (monthly premium) x 12 (months) x 30 (years) = $24,120
Who Should Use Insurance Ladders?
Ladders are not for everyone. It’s important that you have a solid idea of your financial needs for at least the length of the ladder you’re considering. In the above example, the ladder was 30 years long.
If you want to structure coverage that way, take time to map out your financial future, making particular note of factors like mortgage amounts and lengths, educational plans for children, and any other known or reasonably predictable events in your life that might impact the amount of insurance you’d need at any given point.
Are There Any Downsides?
A ladder won’t serve you well if you end up wanting more coverage down the road. If that happens, it would be necessary to purchase a new policy at a much higher cost.
Also, keeping track of premiums and financial data on three or more separate policies can get tricky, so it’s important to have professional help when building a ladder and doing all the accounting.
Finding the right life insurance coverage that fit your plans is might be complicated. Talk to your life insurance agent!